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Asset Bubbles and Bailouts

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  • Tomohiro Hirano
  • Masaru Inaba
  • Noriyuki Yanagawa

Abstract

This paper investigates the relationship between bubbles and government bailouts. Contrary to the previous literature about bailouts, it shows that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and not full bailouts but a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously. The welfare of rescued entrepreneurs is an increasing function of bailout level, but the welfare of taxpayers (workers) shows a non-monotonic relation with bailout level. It shows that even non-risky bubbles may be undesirable for taxpayers.

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Bibliographic Info

Paper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 14-001E.

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Length: 47
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:cnn:wpaper:14-001e

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  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  2. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  3. Hart, O. & Moore, J., 1991. "A Theory of Debt Based on the Inalienability of Human Capital," Working papers 592, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Aoki, Kosuke & Nikolov, Kalin, 2012. "Bubbles, banks and financial stability," Working Paper Series 1495, European Central Bank.
  5. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
  6. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  8. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  9. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
  10. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  11. Nikolov, Kalin, 2010. "Is Private Leverage Excessive?," MPRA Paper 28407, University Library of Munich, Germany, revised Jun 2010.
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