This paper analyzes the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze extensions with firm heterogeneity and stochastic bubbles.
- E2: Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E44: Financial Markets and the Macroeconomy
The Review of Economic Studies, vol. 79, n. 2, 2012, pp. 678–706