Reference

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

Abstract

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.

Keywords

liquidity; bubbles;

JEL codes

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

Research partnership

Regulation, Liquidity and Solvency Risks

Replaces

Emmanuel Farhi, and Jean Tirole, “Bubbly Liquidity”, IDEI Working Paper, n. 577, October 2009, revised February 2011.