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Safe Asset Shortages and Asset Price Bubbles

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  • Kosuke Aoki
  • Tomoyuki Nakajima
  • Kalin Nikolov

Abstract

We build a model economy in which a shortage of safe assets can create conditions for intrinsically useless ‘safe’bubble assets to circulate at a positive price. Our environment features in nitely lived individu-als who are not subject to credit constraints but who face uninsurable idiosyncratic production risk. Bubbly equilibria exist when safe assets offer real returns below the growth rate of the economy. Bubble assets circulate at a positive price only if they o¤er returns which are safe rel-ative to production returns. These ‘safe’bubbles reduce consumption volatility but exert a contractionary e¤ect on the economy.

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Bibliographic Info

Paper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 14-006E.

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Length: 44
Date of creation: May 2014
Date of revision:
Handle: RePEc:cnn:wpaper:14-006e

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  10. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  11. Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
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