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Are the liquidity and collateral roles of asset bubbles different?

Lise Clain-Chamosset-Yvrard (), Xavier Raurich () and Thomas Seegmuller ()
Additional contact information
Thomas Seegmuller: Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France., https://www.amse-aixmarseille.fr/en/members/seegmuller

No 2010, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection , but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the-liquidity or collateral-role attributed to the bubble. We finally extend our analysis to a stochas-tic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.

JEL-codes: D15 E44 G11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-04
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
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Working Paper: Are the liquidity and collateral roles of asset bubbles different? (2020) Downloads
Working Paper: Are the liquidity and collateral roles of asset bubbles different? (2020) Downloads
Working Paper: Are the liquidity and collateral roles of asset bubbles different? (2020) Downloads
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