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Transaction services and asset-price bubbles

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  • Keiichiro Kobayashi

Abstract

This paper studies asset-price bubbles in an economy where a nondepletable asset (e.g., land) can provide transaction services, using a variant of the cash-in-advance model. When a landowner can borrow money immediately using the land as collateral, one can say that land essentially provides a transaction service. The transaction services that such an asset can provide increase as its price becomes higher, since the asset can be exchanged for more money. Thus an asset-price bubble can emerge due to the externality that the asset price reflects the transaction services that it can provide, while the amount of the transaction services reflects the asset price. If the liquidity of the asset (θ) is not too high, there exists a steady state equilibrium where the asset price has a bubble component, and if θ exceeds a certain value, there exists no stable equilibrium. I also analyze the case where θ is endogenous for the representative consumer. Finally, in the case where the equilibrium concept is relaxed to allow for sticky prices and a temporary supply-demand gap, I show that there exists an equilibrium where a bubble develops temporarily and bursts eventually.

Suggested Citation

  • Keiichiro Kobayashi, 2004. "Transaction services and asset-price bubbles," Discussion papers 04026, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:04026
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    References listed on IDEAS

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    1. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. KOBAYASHI Keiichiro & INABA Masaru (RIETI), 2007. "Debt-Ridden Equilibria - A Simple Theory of Great Depressions -," Discussion papers 07035, Research Institute of Economy, Trade and Industry (RIETI).

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