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Asset Bubbles and Bailouts

  • Tomohiro Hirano
  • Masaru Inaba
  • Noriyuki Yanagawa

This paper investigates the relationship between bubbles and government bailouts. Contrary to the previous literature about 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 not full bailouts but a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously. The welfare of rescued entrepreneurs is an increasing function of bailout level, but the welfare of taxpayers (workers) shows a non-monotonic relation with bailout level. It shows that even non-risky bubbles may be undesirable for taxpayers.

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Paper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 14-001E.

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Length: 47
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:cnn:wpaper:14-001e
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  1. Tomohiro Hirano & Noriyuki Yanagawa, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," CARF F-Series CARF-F-223, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Sep 2010.
  2. Hirano, Tomohiro & Yanagawa, Noriyuki, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," MPRA Paper 24085, University Library of Munich, Germany.
  3. Jordi Gal?, 2014. "Monetary Policy and Rational Asset Price Bubbles," American Economic Review, American Economic Association, vol. 104(3), pages 721-52, March.
  4. Nikolov, Kalin, 2010. "Is Private Leverage Excessive?," MPRA Paper 28407, University Library of Munich, Germany, revised Jun 2010.
  5. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  6. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  7. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
  8. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  9. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
  10. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  11. Gertler, Mark & Kiyotaki, Nobuhiro & Queralto, Albert, 2012. "Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, Elsevier, vol. 59(S), pages S17-S34.
  12. Aoki, Kosuke & Nikolov, Kalin, 2015. "Bubbles, banks and financial stability," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 33-51.
  13. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  15. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
  16. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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