Bubbles and Collateral

Yu Awaya, Jihwan Do and Makoto Watanabe

No 11894, CESifo Working Paper Series from CESifo

Abstract: We construct a model of bubbles where an asset can be used as collateral primarily due to higher-order uncertainty: while both a lender and a borrower know that the intrinsic value of the asset is low, they may still believe that a “greater fool” exists who will purchase it at a much higher price. We show that such bubbles can lead to inefficient overinvestment under certain conditions. Using this framework, we also examine the impacts of macroprudential policies, as well as other regulatory measures such as interest rate hikes and the resolution of uncertainty.

Keywords: collateral; higher-order uncertainty; speculative bubbles (search for similar items in EconPapers)
JEL-codes: D82 D83 D84 E44 E52 G12 G14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11894

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