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Transaction services and asset-price bubbles (Revised)

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  • Keiichiro Kobayashi

Abstract

This paper examines asset-price bubbles in an economy where a nondepletable asset (e.g., land) can provide transaction services, using a variant of the cash-in-advance model. When a landowner can borrow money immediately using land as collateral, one can say that land essentially provides a transaction service. The transaction services that such an asset can provide increase as its price rises, since the asset owner can borrow more money against the asset's increased value. Thus an asset-price bubble can emerge due to the externality of self-reference, wherein the asset price reflects the transaction services that it can provide, while the amount of the transaction services reflects the asset price. If the collateral ratio of the asset (¥ó' and money supply (m) are not very large, a steady state equilibrium exists where the asset price has a bubble component and resource allocation is inefficient; if ¥ó'and/or m become large, the bubble component of the asset price vanishes and the equilibrium allocation becomes efficient. The paper shows that in the case where the equilibrium concept is relaxed to allow for sticky prices and a temporary supply-demand gap, an equilibrium exists where a bubble develops temporarily and eventually bursts.

Suggested Citation

  • Keiichiro Kobayashi, 2006. "Transaction services and asset-price bubbles (Revised)," Discussion papers 06010, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:06010
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    File URL: https://www.rieti.go.jp/jp/publications/dp/06e010.pdf
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    References listed on IDEAS

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    1. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation for Research in Economics, Yale University.
    2. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters,in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
    3. Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-1171, December.
    4. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    5. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
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