Loans from the Government, Overinvestment by Households, and Asset Bubbles
Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research
June 30, 2012
We investigate the role of government-provided loans on market outcomes. First, we show that government-provided financing can lead to asset bubbles when enough households have adaptive expectations and determine the minimum share of households with adaptive expectation that is sufficient for bubbles to arise. Second, we show that in addition to causing bubbles government-provided loans can generate a propagation mechanism behind them. Third, we show that bubbles can be avoided if financing is provided over a sufficiently large number of periods rather than all at once, even when households have adaptive expectations.
Keywords: Asset bubbles, government-provided financingworking papers series
Date posted: March 24, 2012 ; Last revised: May 29, 2013
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