Bubbly Liquidity

Emmanuel Farhi, and Jean Tirole


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.


liquidity; bubbles;

JEL codes

  • E2: Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • E44: Financial Markets and the Macroeconomy


Emmanuel Farhi, and Jean Tirole, Bubbly Liquidity, TSE Working Paper, n. 09-101, October 2009, revised February 2011.

See also

Published in

The Review of Economic Studies, vol. 79, n. 2, 2012, pp. 678–706