Working paper

Bubbly Liquidity

Emmanuel Farhi, and Jean Tirole

Abstract

This paper analyzes the possibility and the consequences of asset price overvaluation 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 the economic implications of firm heterogeneity, endogenous corporate governance, and stochastic bubbles. Finally we draw some implications for the way public policy could react to bubbles.

JEL codes

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

Replaced by

Emmanuel Farhi, and Jean Tirole, Bubbly Liquidity, The Review of Economic Studies, vol. 79, n. 2, 2012, pp. 678–706.

Reference

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

Published in

TSE Working Paper, n. 09-101, October 2009, revised February 2011