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.
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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number
04026.
Length: 26 pages Date of creation: Aug 2004 Date of revision: Handle: RePEc:eti:dpaper:04026
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kiyotaki, Nobuhiro & Moore, John, 1997.
"Credit Cycles,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 211-48, April.
Other versions:
Nobuhiro Kiyotaki & John Moore, 1995.
"Credit Cycles,"
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
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John Moore & Nobuhiro Kiyotaki, .
"Credit Cycles,"
Discussion Papers
1995-5, Edinburgh School of Economics, University of Edinburgh.
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