Transaction Services And Asset-Price Bubbles
This paper studies asset-price bubbles in an economy where a nondepletable asset (e.g., land) can provide transaction services, using a variant of the cash-in-advance model. When a landowner can borrow money immediately using the land as collateral, one can say that land essentially provides a transaction service. The transaction services that such an asset can provide increase as its price becomes higher, since the asset can be exchanged for more money. Thus an asset-price bubble can emerge due to the externality that the asset price reflects the transaction services that it can provide, while the amount of the transaction services reflects the asset price. If the liquidity of the asset (θ) is not too high, there exists a steady state equilibrium where the asset price has a bubble component, and if θ exceeds a certain value, there exists no stable equilibrium. I also analyze the case where θ is endogenous for the representative consumer. Finally, in the case where the equilibrium concept is relaxed to allow for sticky prices and a temporary supply-demand gap, I show that there exists an equilibrium where a bubble develops temporarily and bursts eventually.
(This abstract was borrowed from another version of this item.)
Volume (Year): 12 (2008)
Issue (Month): 03 (June)
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- Stephen Morris & Franklin Allen & Hyun Song Shin, 2004.
"Beauty Contests, Bubbles and Iterated Expectations in Asset Markets,"
Yale School of Management Working Papers
ysm346, Yale School of Management.
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"The Japanese Banking Crisis: Where Did It Come From and How Will It End?,"
in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212
National Bureau of Economic Research, Inc.
- Takeo Hoshi & Anil Kashyap, 1999. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Working Papers 7250, National Bureau of Economic Research, Inc.
- Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-71, December.
- Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
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