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Bubbles, Banks, and Financial Stability

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Author Info

  • 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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File URL: http://www.imes.boj.or.jp/research/papers/english/11-E-24.pdf
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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. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
  2. Martin, Alberto & Ventura, Jaume, 2010. "Theoretical Notes on Bubbles and the Current Crisis," CEPR Discussion Papers 8038, C.E.P.R. Discussion Papers.
  3. Nikolov, Kalin, 2011. "A model of borrower reputation as intangible collateral," MPRA Paper 32939, University Library of Munich, Germany.
  4. Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," IDEI Working Papers 577, Institut d'Économie Industrielle (IDEI), Toulouse, revised Feb 2011.
  5. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
  6. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  7. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  8. Ventura, Jaume, 2002. "Bubbles and Capital Flows," CEPR Discussion Papers 3657, C.E.P.R. Discussion Papers.
  9. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2010. "Adjusting to Capital Account Liberalization," CEP Discussion Papers dp1014, Centre for Economic Performance, LSE.
  10. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
  11. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
  12. John H. Boyd & Gianni De Nicoló & Abu M. Jalal, 2009. "Bank Competition, Risk and Asset Allocations," IMF Working Papers 09/143, International Monetary Fund.
  13. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  14. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
  15. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
  16. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  17. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  18. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, vol. 101(2), pages 877-99, April.
  19. 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 1039, European Central Bank.
  20. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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Citations

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Cited by:
  1. Alberto Martin & Jaume Ventura, 2012. "Managing credit bubbles," Economics Working Papers 1367, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2014.
  2. Hirano, Tomohiro & Inaba, Masaru, 2010. "Asset Price Bubbles in the Kiyotaki-Moore Model," MPRA Paper 36632, University Library of Munich, Germany.
  3. Tomohiro Hirano & Noriyuki Yanagawa, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," CARF F-Series CARF-F-223, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Sep 2010.
  4. Tomohiro Hirano & Masaru Inaba & Noriyuki Yanagawa, 2014. "Asset Bubbles and Bailouts," CIGS Working Paper Series 14-001E, The Canon Institute for Global Studies.
    • Tomohiro Hirano & Masaru Inaba & Noriyuki Yanagawa, 2012. "Asset Bubbles and Bailouts," CARF F-Series CARF-F-268, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  5. Tomohiro Hirano & Noriyuki Yanagawa, 2012. "Asset Bubbles and Bailout," CIRJE F-Series CIRJE-F-838, CIRJE, Faculty of Economics, University of Tokyo.
    • Tomohiro Hirano & Masaru Inaba & Noriyuki Yanagawa, 2012. "Asset Bubbles and Bailouts," CARF F-Series CARF-F-268, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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