How Low Interest Rates Discern the Bubbles Nature: Leveraged vs Unleveraged Bubble

Jacopo Bonchi and Francesco Lucidi

No 12/20, Working Papers from Sapienza University of Rome, DISS

Abstract: Leveraged asset price bubbles, i.e., periods of boom-bust phases in asset prices accompanied by credit overhangs, are more harmful than unleveraged ones, in terms of financial and price stability. As bubbles are difficult to detect in real-time data, early researches focused on the macroeconomic conditions exacerbating the bubbles' nature. What kind of bubble is likely to emerge in an economy characterized by slow growth and a low real interest rate? This paper shows why the leveraged bubble is the answer to this question. First, we show that a negative real rate is sufficient for leveraged bubbles to emerge but not for unleveraged ones, in a stylized OLG model with incomplete credit markets and income inequality. Second, we show that this result holds empirically for post-World War II bubbles in advanced economies.

Keywords: low interest rates; leveraged bubbles; unleveraged bubbles (search for similar items in EconPapers)
JEL-codes: E43 E44 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.diss.uniroma1.it/sites/default/files/al ... Lucidi_wp12_2020.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.diss.uniroma1.it:80 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:saq:wpaper:12/20

Access Statistics for this paper

More papers in Working Papers from Sapienza University of Rome, DISS Contact information at EDIRC.
Bibliographic data for series maintained by Pierluigi Montalbano ().