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Toxic asset bubbles

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  • Daisuke Ikeda

    ()

  • Toan Phan

    ()

Abstract

We develop an overlapping generations model with leveraged investment in speculative asset bubbles. Financial intermediaries use borrowed funds to speculate on a risky asset bubble, which promises high returns as long as it does not collapse. They can, however, default on their debt and shift the losses to lenders when the bubble collapses. This risk shifting leads to welfare-reducing (or “toxic”) rational asset bubbles. We then analyze a set of often discussed policy interventions: pricking bubbles, macroprudential regulations, and leverage restriction. Copyright Springer-Verlag Berlin Heidelberg 2016

Suggested Citation

  • Daisuke Ikeda & Toan Phan, 2016. "Toxic asset bubbles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 241-271, February.
  • Handle: RePEc:spr:joecth:v:61:y:2016:i:2:p:241-271
    DOI: 10.1007/s00199-015-0928-1
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    • Daisuke Ikeda & Toan Phan, 2016. "Toxic asset bubbles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 241-271, February.

    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Biswas, Siddhartha & Hanson, Andrew & Phan, Toan, 2018. "Bubbly Recessions," Working Paper 18-5, Federal Reserve Bank of Richmond.
    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. repec:aea:aejmac:v:11:y:2019:i:3:p:209-51 is not listed on IDEAS
    4. King Yoong Lim & Pengfei Jia, 2018. "Tax Policy and Toxic Housing Bubbles in China," Working Papers 2018/03, Nottingham Trent University, Nottingham Business School, Economics Division.
    5. repec:spr:joecth:v:66:y:2018:i:3:d:10.1007_s00199-017-1082-8 is not listed on IDEAS
    6. repec:eee:jetheo:v:177:y:2018:i:c:p:280-314 is not listed on IDEAS
    7. Bengui, Julien & Phan, Toan, 2018. "Asset pledgeability and endogenously leveraged bubbles," Journal of Economic Theory, Elsevier, vol. 177(C), pages 280-314.
    8. Mathieu Boullot, 2017. "Secular Stagnation, Liquidity Trap and Rational Asset Price Bubbles," Working Papers halshs-01295012, HAL.
    9. Daisuke Ikeda & Toan Phan, 2019. "Asset Bubbles and Global Imbalances," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 209-251, July.
    10. Graczyk, Andrew & Phan, Toan, 2018. "Regressive Welfare Effects of Housing Bubbles," Working Paper 18-10, Federal Reserve Bank of Richmond.
    11. Jianjun Miao, 2016. "Introduction to the symposium on bubbles, multiple equilibria, and economic activities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 207-214, February.
    12. Martin Barbie & Marten Hillebrand, 2018. "Bubbly Markov equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(3), pages 627-679, October.
    13. repec:eee:jmacro:v:59:y:2019:i:c:p:195-216 is not listed on IDEAS

    More about this item

    Keywords

    Rational bubbles; Risk shifting; Financial crises; F32; F41; F44;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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