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Asset Bubbles and Bailout

  • Tomohiro Hirano

    (Faculty of Economics, University of Tokyo)

  • Noriyuki Yanagawa

    (Faculty of Economics, University of Tokyo)

This paper theoretically investigates the relationship between asset price bubbles and bailout. We show that although bailout may mitigate adverse e¤ects of bubbles' bursting ex-post, it is more likely to cause asset price bubbles by encouraging risk-taking behavior ex-ante. In other words, bubbles are more likely to occur, the more government bailout is anticipated. Moreover, when productivity is relatively low, the anticipated bailout accelerates bubbly booms and creates large bubbles, which results in a large scale government intervention when bubbles collapse.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2012/2012cf838.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-838.

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Length: 39 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:tky:fseres:2012cf838
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  1. 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.
  2. 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.
  3. Hart, Oliver & Moore, John, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 841-79, November.
  4. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  5. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  6. Kosuke Aoki & Kalin Nikolov, 2011. "Bubbles, Banks, and Financial Stability," CARF F-Series CARF-F-253, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  7. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  8. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
  9. Harald Uhlig, 2009. "A Model of a Systemic Bank Run," Working Papers 2009-006, Becker Friedman Institute for Research In Economics.
  10. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  11. Nikolov, Kalin, 2010. "Is Private Leverage Excessive?," MPRA Paper 28407, University Library of Munich, Germany, revised Jun 2010.
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