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Bubbly Liquidity

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  • Emmanuel Farhi
  • Jean Tirole

Abstract

This paper analyzes the possibility and the consequences of rational bubbles in a dy- namic economy where financially constrained firms demand and supply liquidity. Bub- bles 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 extensions with firm heterogeneity and sto- chastic bubbles.

Suggested Citation

  • Emmanuel Farhi & Jean Tirole, 2011. "Bubbly Liquidity," NBER Working Papers 16750, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16750
    Note: EFG ME
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    References listed on IDEAS

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    1. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1243-1259.
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    More about this item

    JEL classification:

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

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