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Bubbles, Banks, and Financial Stability

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Author Info

  • Kosuke Aoki

    (Faculty of Economics, University of Tokyo)

  • Kalin Nikolov

    (European Central Bank)

Abstract

This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2) When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/263.pdf
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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-253.

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Length: 57 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:cfi:fseres:cf253

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  1. Nikolov, Kalin, 2011. "A model of borrower reputation as intangible collateral," MPRA Paper 32939, University Library of Munich, Germany.
  2. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  3. Alberto Martin & Jaume Ventura, 2010. "Theoretical Notes on Bubbles and the Current Crisis," NBER Working Papers 16399, National Bureau of Economic Research, Inc.
  4. Jaume Ventura, 2004. "Bubbles and capital flows," 2004 Meeting Papers 102, Society for Economic Dynamics.
  5. Emmanuel Farhi & Jean Tirole, 2012. "Bubbly Liquidity," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 678-706.
  6. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, vol. 101(2), pages 877-99, April.
  7. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
  8. Frederic S. Mishkin, 2008. "How should we respond to asset price bubbles?: a speech at the Wharton Financial Institutions Center and Oliver Wyman Institute's Annual Financial Risk Roundtable, Philadelphia, Pennsylvania, May 15, ," Web Site, Board of Governors of the Federal Reserve System (U.S.).
  9. Aoki, Kosuke & Benigno, Gianluca & Kiyotaki, Nobuhiro, 2010. "Adjusting to Capital Account Liberalization," CEPR Discussion Papers 8087, C.E.P.R. Discussion Papers.
  10. Lucia Alessi & Carsten Detken, 2009. "Real Time’ early warning indicators for costly asset price boom/bust cycles - a role for global liquidity," Working Paper Series 1039, European Central Bank.
  11. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  12. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  13. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
  14. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
  15. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  16. John H. Boyd & Gianni De Nicoló & Abu M. Jalal, 2009. "Bank Competition, Risk and Asset Allocations," IMF Working Papers 09/143, International Monetary Fund.
  17. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
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Cited by:
  1. Tomohiro Hirano & Masaru Inaba & Noriyuki Yanagawa, 2012. "Asset Bubbles and Bailouts," CARF F-Series CARF-F-268, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  2. Hirano, Tomohiro & Inaba, Masaru, 2010. "Asset Price Bubbles in the Kiyotaki-Moore Model," MPRA Paper 36632, University Library of Munich, Germany.

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