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Bubbles, collateral and monetary equilibrium

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  • Torres-Martínez, Juan Pablo
  • Araújo, Aloísio Pessoa de
  • Pascoa, Mario Rui

Abstract

Consider an economy where infinite-lived agents trade assets collateralized by durable goods. We obtain results that rule out bubbles when the additional endowments of durable goods are uniformly bounded away from zero, regardless of whether the asset’s net supply is positive or zero. However, bubbles may occur, even for state-price processes that generate finite present value of aggregate wealth. First, under complete markets, if the net supply is being endogenously reduced to zero as a result of collateral repossession. Secondly, under incomplete markets, for a persistent positive net supply, under the general conditions guaranteeing existence of equilibrium. Examples of monetary equilibria are provided.

Suggested Citation

  • Torres-Martínez, Juan Pablo & Araújo, Aloísio Pessoa de & Pascoa, Mario Rui, 2006. "Bubbles, collateral and monetary equilibrium," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 614, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:epgewp:614
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    Cited by:

    1. Miguel A. Iraola & Juan Pablo Torres-Martinez, 2013. "Liquidity Contractions, Incomplete Financial Participation and the Prevalence of Negative Equity Non-Recourse Loans," Working Papers 2013-08, University of Miami, Department of Economics.

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