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Asset bubbles and bailouts

Author

Listed:
  • Hirano, Tomohiro
  • Inaba, Masaru
  • Yanagawa, Noriyuki

Abstract

As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, this paper investigates the relationship between bubbles and government bailouts. It shows that bailouts for bursting bubbles may positively influence ex ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and a “partial bailout” policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.

Suggested Citation

  • Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset bubbles and bailouts," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 71-89.
  • Handle: RePEc:eee:moneco:v:76:y:2015:i:s:p:s71-s89
    DOI: 10.1016/j.jmoneco.2015.09.008
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    Cited by:

    1. Pengfei Wang & Jing Zhou & Jianjun Miao, 2015. "Housing Bubbles and Policy Analysis," 2015 Meeting Papers 1056, Society for Economic Dynamics.
    2. Alberto Martin & Jaume Ventura, 2018. "The Macroeconomics of Rational Bubbles: A User's Guide," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 505-539, August.
    3. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2019. "Recurrent Bubbles and Economic Growth," CARF F-Series CARF-F-457, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Ken-ichi Hashimoto & Ryonghun Im & Takuma Kunieda & Akihisa Shibata, 2020. "Asset Bubbles, Unemployment, and Financial Market Frictions," Discussion Papers 2013, Graduate School of Economics, Kobe University.
    5. Takuma Kunieda & Tarishi Matsuoka & Akihisa Shibata, 2017. "Asset Bubbles, Technology Choice, and Financial Crises," Discussion Paper Series 157, School of Economics, Kwansei Gakuin University, revised Feb 2017.
    6. Saki Bigio & Eduardo Zilberman, 2020. "Speculation-Driven Business Cycles," Working Papers Central Bank of Chile 865, Central Bank of Chile.
    7. Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset bubbles and bailouts," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 71-89.
    8. Bengui, Julien & Phan, Toan, 2018. "Asset pledgeability and endogenously leveraged bubbles," Journal of Economic Theory, Elsevier, vol. 177(C), pages 280-314.
    9. Toan Phan & Andrew Hanson & Siddhartha Biswas, 2018. "Bubbly Recessions," 2018 Meeting Papers 440, Society for Economic Dynamics.
    10. Atsushi Motohashi, 2020. "Effectiveness of Bailout Policies for Asset Bubbles in a Small Open Economy," KIER Working Papers 1048, Kyoto University, Institute of Economic Research.
    11. Atsushi Motohashi, 2020. "Bubbles, the U.S. Interest Policy, and the Impact on Global Economic Growth: Reverse Growth Effects of Lower Interest Rates after Bubble Bursting," KIER Working Papers 1041, Kyoto University, Institute of Economic Research.
    12. Bosi, Stefano & Pham, Ngoc-Sang, 2016. "Taxation, bubbles and endogenous growth," Economics Letters, Elsevier, vol. 143(C), pages 73-76.
    13. Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset Bubbles and Bailouts," HIT-REFINED Working Paper Series 19, Institute of Economic Research, Hitotsubashi University.
    14. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma, 2020. "Asset Bubbles, Unemployment, and a Financial Crisis," Journal of Macroeconomics, Elsevier, vol. 65(C).
    15. Floro, Danvee, 2019. "Testing the predictive ability of house price bubbles for macroeconomic performance: A meta-analytic approach," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 164-181.
    16. Shuping Shi & Peter C B Phillips, 2020. "Diagnosing housing fever with an econometric thermometer," CAMA Working Papers 2020-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    17. Miao, Jianjun & Wang, Pengfei & Zhou, Jing, 2015. "Asset bubbles, collateral, and policy analysis," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 57-70.
    18. Kunieda, Takuma & Shibata, Akihisa, 2016. "Asset bubbles, economic growth, and a self-fulfilling financial crisis," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 70-84.
    19. Wan, Junmin, 2018. "Prevention and landing of bubble," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 190-204.
    20. Andrew Graczyk & Toan Phan, 2018. "Regressive Welfare Effects of Housing Bubbles," Working Paper 18-10, Federal Reserve Bank of Richmond.
    21. Ryosuke Shimizu, 2018. "Bubbles, growth and imperfection of credit market in a two-country model," Annals of Finance, Springer, vol. 14(3), pages 353-377, August.
    22. Theodosios Perifanis, 2019. "Detecting West Texas Intermediate (WTI) Prices’ Bubble Periods," Energies, MDPI, Open Access Journal, vol. 12(14), pages 1-16, July.
    23. Martin Guzman & Joseph E. Stiglitz, 2016. "Pseudo-wealth and Consumption Fluctuations," NBER Working Papers 22838, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Bubble size; Anticipated bailouts; Production efficiency; Boom–bust cycles; Optimal bailout policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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