Asset Bubbles and Bailouts

41 Pages Posted: 8 May 2018

See all articles by Tomohiro Hirano

Tomohiro Hirano

The University of Tokyo

Masaru Inaba

Kansai University; The Canon Institute for Global Studies; Boston University

Noriyuki Yanagawa

University of Tokyo - Faculty of Economics

Date Written: September 25, 2015

Abstract

As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, this paper investigates the relationship between bubbles and government bailouts. It shows that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.

Keywords: Bubble Size, Anticipated Bailouts, Production Efficiency, Boom-Bust Cycles, Optimal Bailout Policy

JEL Classification: E32, E44, E61

Suggested Citation

Hirano, Tomohiro and Inaba, Masaru and Yanagawa, Noriyuki, Asset Bubbles and Bailouts (September 25, 2015). Available at SSRN: https://ssrn.com/abstract=3167835 or http://dx.doi.org/10.2139/ssrn.3167835

Tomohiro Hirano (Contact Author)

The University of Tokyo ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo, 113-0033
Japan

Masaru Inaba

Kansai University ( email )

3-3-35 Yamatecho
Osaka, 564-8680
Japan

The Canon Institute for Global Studies

11F, Shin-Marunouchi Bldg
Chiyoda-ku, Tokyo 100-6511
Japan

Boston University

595 Commonwealth Avenue
Boston, MA 02215
United States

Noriyuki Yanagawa

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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