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Asset Bubbles and Bailouts

Author

Listed:
  • Hirano, Tomohiro
  • Inaba, Masaru
  • Yanagawa, Noriyuki

Abstract

This paper investigates the relationship between bubbles and governmentbailouts. As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, we show 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 a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.

Suggested Citation

  • Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset Bubbles and Bailouts," HIT-REFINED Working Paper Series 19, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:remfce:19
    Note: First Version: April 2011, This Version: March 2015
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/27746/wp019.pdf
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    More about this item

    Keywords

    Bubble Size; Anticipated Bailouts; Production Efficiency; Boom-Bust Cycles; Optimal Bailout Policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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