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Bubbles, Banks, and Financial Stability

  • Kosuke Aoki

    (University of Tokyo (email:

  • Kalin Nikolov

    (European Central Bank(email:

This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2)When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-24.

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Date of creation: Sep 2011
Date of revision:
Handle: RePEc:ime:imedps:11-e-24
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