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Safe Asset Shortages and Asset Price Bubbles

  • Kosuke Aoki

    (The University of Tokyo)

  • Tomoyuki Nakajima

    (Kyoto University and CIGS)

  • Kalin Nikolov

    (European Central Bank)

We build a model economy in which a shortage of safe assets can create conditions for intrinsically useless 'safe' bubble assets to circulate at a positive price. Our environment features in nitely lived individuals who are not subject to credit constraints but who face uninsurable idiosyncratic production risk. Bubbly equilibria exist when safe assets offer real returns below the growth rate of the economy. Bubble assets circulate at a positive price only if they o er returns which are safe relative to production returns. These 'safe' bubbles reduce consumption volatility but exert a contractionary effect on the economy.

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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-344.

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Length: 44 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:cfi:fseres:cf344
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