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Safe Asset Shortages and Asset Price Bubbles

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  • Kosuke Aoki

    ()
    (University of Tokyo)

  • Tomoyuki Nakajima

    ()
    (Kyoto University and CIGS)

  • Kalin Nikolov

    ()
    (European Central Bank)

Abstract

We build a model economy in which a shortage of safe assets can create conditions for intrinsically useless `safe' bubble assets to circulate at a positive price. Our environment features infinitely lived individuals who are not subject to credit constraints but who face uninsurable idiosyncratic production risk. Bubbly equilibria exist when safe assets offer real returns below the growth rate of the economy. Bubble assets circulate at a positive price only if they offer returns which are safe relative to production returns. These `safe' bubbles reduce consumption volatility but exert a contractionary effect on the economy.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP894.pdf
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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 894.

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Length: 41pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:kyo:wpaper:894

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Keywords: Safe Asset Shortage; Asset Price Bubbles.;

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  1. Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers 3632, C.E.P.R. Discussion Papers.
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  8. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  9. Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
  10. Akiomi Kitagawa, 2001. "Money-Hoarding as a Behaviour Towards Uninsured Idiosyncratic Risk," The Japanese Economic Review, Japanese Economic Association, vol. 52(1), pages 93-103.
  11. Kitagawa, Akiomi, 1994. "Risky storage and the value of money," Economics Letters, Elsevier, vol. 45(1), pages 73-77, May.
  12. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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  14. Saito, Makoto, 1998. "A simple model of incomplete insurance the case of permanent shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 763-777, May.
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