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Bubbly Liquidity

date Date: June 1, 2011
date Author(s): Emmanuel Farhi, Jean Tirole
date Affiliation: Harvard University-Toulouse School of Economics
Abstract

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.

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