This paper analyses 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 analyse extensions with firm heterogeneity and stochastic bubbles.
Submitted by Staff on October 15, 2014
|Date: June 1, 2011|
|Author(s): Emmanuel Farhi, Jean Tirole|
|Affiliation: Harvard University-Toulouse School of Economics|