Working Paper: NBER ID: w16750
Authors: Emmanuel Farhi; Jean Tirole
Abstract: This paper analyzes the possibility and the consequences of rational bubbles in a dy- namic economy where financially constrained firms demand and supply liquidity. Bub- bles 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 analyze extensions with firm heterogeneity and sto- chastic bubbles.
Keywords: liquidity; bubbles
JEL Codes: E2; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Supply of outside liquidity is scarce (E51) | Bubbles are more likely to emerge (E32) |
| Pledgeability of corporate income is limited (G33) | Bubbles are more likely to emerge (E32) |
| Liquidity is abundant (G19) | Increased investment (E22) |
| Scarcity of liquidity (E44) | Crowds out investment (E22) |
| Crash of a bubble (E32) | Negatively impacts firms' financial net worth (G32) |
| Negatively impacts firms' financial net worth (G32) | Further reductions in liquidity (G33) |
| Presence of bubbles (E32) | Affects financial stability and investment capacity (F65) |
| Bubbles carry a liquidity premium (G19) | Bubble yields little to no return (G19) |
| Adverse shocks to corporate net worth (G33) | Endogenously trigger dynamics surrounding bubbles (E32) |
| Existence of bubbles (E32) | Different impacts on firms based on ability to pledge future cash flows (G32) |