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Bubbly Liquidity

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  • Emmanuel Farhi
  • Jean Tirole

Abstract

This paper analyses the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles 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 analyse extensions with firm heterogeneity and stochastic bubbles. Copyright 2012, Oxford University Press.

Suggested Citation

  • Emmanuel Farhi & Jean Tirole, 2012. "Bubbly Liquidity," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 678-706.
  • Handle: RePEc:oup:restud:v:79:y:2012:i:2:p:678-706
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    File URL: http://hdl.handle.net/10.1093/restud/rdr039
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    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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