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Loans from the Government, Overinvestment by Households, and Asset Bubbles

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  • Viktar Fedaseyeu
  • Vitaliy Strohush
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    Abstract

    We investigate the role of government-provided loans on market outcomes. First, we show that government-provided financing can lead to asset bubbles when enough households have adaptive expectations and determine the minimum share of households with adaptive expectation that is sufficient for bubbles to arise. Second, we show that in addition to causing bubbles government-provided loans can generate a propagation mechanism behind them. Third, we show that bubbles can be avoided if financing is provided over a sufficiently large number of periods rather than all at once, even when households have adaptive expectations.

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    File URL: ftp://ftp.igier.unibocconi.it/wp/2012/443.pdf
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    Bibliographic Info

    Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 443.

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    Date of creation: 2012
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    Handle: RePEc:igi:igierp:443

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