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Bubbly Liquidity

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Author Info
Farhi, Emmanuel
Tirole, Jean
Abstract

This paper analyzes the possibility and the consequences of asset price overvaluation in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze the economic implications of firm heterogeneity, endogenous corporate governance, and stochastic bubbles. Finally we draw some implications for the way public policy could react to bubbles.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 577.

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Date of creation: Oct 2009
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Handle: RePEc:ide:wpaper:21402

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E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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This page was last updated on 2009-12-16.

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