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A Leverage-Based Model of Speculative Bubbles

57 Pages Posted: 27 Jan 2008  

Gadi Barlevy

Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: January 2008

Abstract

This paper develops an equilibrium model of speculative bubbles that can be used to explore the role of various policies in either giving rise to or eliminating the possibility of asset bubbles, e.g. restricting the use of certain types of loan contracts, imposing down-payment restrictions, and changing inter-bank rates. As in previous work by Allen and Gorton (1993) and Allen and Gale (2000), a bubble arises in the model because traders are assumed to purchase assets with borrowed funds. My model adds to this literature by allowing creditors and traders to enter into a more general class of contracts, as well as by allowing speculators to trade strategically.

Keywords: speculation, bubble, asymmetric information, credit

JEL Classification: G12, E44, D82

Suggested Citation

Barlevy, Gadi, A Leverage-Based Model of Speculative Bubbles (January 2008). FRB of Chicago Working Paper No. 2008-01. Available at SSRN: https://ssrn.com/abstract=1087353 or http://dx.doi.org/10.2139/ssrn.1087353

Gadi Barlevy (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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