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Are the liquidity and collateral roles of asset bubbles different?

Lise Clain-Chamosset-Yvrard (), Xavier Raurich () and Thomas Seegmuller ()
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Thomas Seegmuller: Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE. 5 Boulevard Maurice Bourdet CS 50498 F-13205 Marseille cedex 1, France

No 2013, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

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 stochastic 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.

Keywords: Bubble; Liquidity; Collateral; Crowding-in effect; Growth (search for similar items in EconPapers)
JEL-codes: D15 E44 G11 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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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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