Are the Liquidity and Collateral Roles of Asset Bubbles Different?

41 Pages Posted: 5 May 2020

See all articles by Lise Clain-Chamosset-Yvrard

Lise Clain-Chamosset-Yvrard

University of Lyon 2

Xavier Raurich

University of Barcelona

Thomas Seegmuller

Aix-Marseille University - Aix-Marseille School of Economics

Date Written: April 9, 2020

Abstract

Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection, but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the - liquidity or collateral role attributed to the bubble. We finally extend our analysis to a stochastic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.

Keywords: Bubble, Liquidity, Collateral, Crowding-in effect, Growth

JEL Classification: D15, E44, G11

Suggested Citation

Clain-Chamosset-Yvrard, Lise and Raurich, Xavier and Seegmuller, Thomas, Are the Liquidity and Collateral Roles of Asset Bubbles Different? (April 9, 2020). Available at SSRN: https://ssrn.com/abstract=3572024 or http://dx.doi.org/10.2139/ssrn.3572024

Lise Clain-Chamosset-Yvrard (Contact Author)

University of Lyon 2 ( email )

93 Chemin des Mouilles
Ecully, 69009
France

Xavier Raurich

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Thomas Seegmuller

Aix-Marseille University - Aix-Marseille School of Economics ( email )

Centre de la vieille Charité
2 rue de la Charité
13236 Marseille
France

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