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Bubbles, Banks, and Financial Stability

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  • Kosuke Aoki

    (University of Tokyo (email: kaoki@e.u-tokyo.ac.jp))

  • Kalin Nikolov

    (European Central Bank(email: kalin.nikolov@ecb.int))

Abstract

This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2)When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-24.

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Date of creation: Sep 2011
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Handle: RePEc:ime:imedps:11-e-24

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Keywords: Rational bubbles; Financial Frictions; Financial Stability;

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References

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  1. Nikolov, Kalin, 2012. "A model of borrower reputation as intangible collateral," Working Paper Series, European Central Bank 1490, European Central Bank.
  2. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(1), pages 35-53, January.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  4. Chad Syverson, 2001. "Market Structure and Productivity: A Concrete Example," Working Papers, Center for Economic Studies, U.S. Census Bureau 01-06, Center for Economic Studies, U.S. Census Bureau.
  5. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(1), pages 106-131, February.
  6. Martin, Alberto & Ventura, Jaume, 2011. "Theoretical notes on bubbles and the current crisis," Working Paper Series, European Central Bank 1348, European Central Bank.
  7. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1268-1290, September.
  8. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(3), pages 555-576, March.
  9. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  10. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers, Edinburgh School of Economics, University of Edinburgh 1995-5, Edinburgh School of Economics, University of Edinburgh.
  11. Ventura, Jaume, 2002. "Bubbles and Capital Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3657, C.E.P.R. Discussion Papers.
  12. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1499-1528, November.
  13. Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 577, Institut d'Économie Industrielle (IDEI), Toulouse, revised Feb 2011.
  14. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series, European Central Bank 1039, European Central Bank.
  15. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 51(3), pages 413-38, July.
  16. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(1), pages 17-34, January.
  17. John H. Boyd & Gianni De Nicoló & Abu M. Jalal, 2009. "Bank Competition, Risk and Asset Allocations," IMF Working Papers, International Monetary Fund 09/143, International Monetary Fund.
  18. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series, European Central Bank 1192, European Central Bank.
  19. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2010. "Adjusting to Capital Account Liberalization," CEP Discussion Papers, Centre for Economic Performance, LSE dp1014, Centre for Economic Performance, LSE.
  20. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, American Economic Association, vol. 101(2), pages 877-99, April.
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Citations

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Cited by:
  1. Alberto Martin & Jaume Ventura, 2014. "Managing Credit Bubbles," IMF Working Papers, International Monetary Fund 14/95, International Monetary Fund.
  2. Tomohiro Hirano & Masaru Inaba & Noriyuki Yanagawa, 2014. "Asset Bubbles and Bailouts," CIGS Working Paper Series, The Canon Institute for Global Studies 14-001E, The Canon Institute for Global Studies.
  3. Tomohiro Hirano & Noriyuki Yanagawa, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-752, CIRJE, Faculty of Economics, University of Tokyo.
  4. Tomohiro Hirano & Noriyuki Yanagawa, 2012. "Asset Bubbles and Bailout," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-838, CIRJE, Faculty of Economics, University of Tokyo.
  5. Hirano, Tomohiro & Inaba, Masaru, 2010. "Asset Price Bubbles in the Kiyotaki-Moore Model," MPRA Paper 36632, University Library of Munich, Germany.

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