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Asset Bubbles and Bailout

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  • Tomohiro Hirano

    (Faculty of Economics, University of Tokyo)

  • Noriyuki Yanagawa

    (Faculty of Economics, University of Tokyo)

Abstract

This paper theoretically investigates the relationship between asset price bubbles and bailout. We show that although bailout may mitigate adverse e¤ects of bubbles' bursting ex-post, it is more likely to cause asset price bubbles by encouraging risk-taking behavior ex-ante. In other words, bubbles are more likely to occur, the more government bailout is anticipated. Moreover, when productivity is relatively low, the anticipated bailout accelerates bubbly booms and creates large bubbles, which results in a large scale government intervention when bubbles collapse.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2012/2012cf838.pdf
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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-838.

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Length: 39 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:tky:fseres:2012cf838

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  1. Harald Uhlig, 2009. "A Model of a Systemic Bank Run," Working Papers 2009-006, Becker Friedman Institute for Research In Economics.
  2. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  3. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  6. Kosuke Aoki & Kalin Nikolov, 2011. "Bubbles, Banks, and Financial Stability," IMES Discussion Paper Series 11-E-24, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November.
  8. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  9. Nikolov, Kalin, 2010. "Is Private Leverage Excessive?," MPRA Paper 28407, University Library of Munich, Germany, revised Jun 2010.
  10. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  11. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
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