Asset Price Bubbles in the Kiyotaki-Moore Model

Hirano, Tomohiro and Inaba, Masaru (2010): Asset Price Bubbles in the Kiyotaki-Moore Model.

Abstract

We examine the effect of asset price bubbles in the Kiyotaki-Moore model. We show that the dynamic interactions between bubble-asset price, land price, and output generate powerful bubbly dynamics. The boom-bust cycles in bubble-asset price cause boom-crash cycles in the land market simultaneously, like a contagion by affecting the fundamentals of land. We also numerically analyze the welfare effects of bubbles in transitional dynamics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bubbly Dynamics, Contagion, Welfare Effects of Bubbles
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

[1] Aoki, Kosuke, and Kalin Nikolov. 2011. “Bubbles, Banks and Financial Stability,” Working Paper, CARF-F-253, The University of Tokyo.

[2] Bernanke, Ben, and Mark Gertler. 1989. “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, 79(1): 14–31.

[3] Bernanke, Ben, Mark Gerlter, and Simon Gilchrist. 1999. “The FinancialAccelerator in a Quantitative Business Cycle Framework,” in J. Taylor and M. Woodford eds, the Handbook of Macroeconomics, 1341-1393. Amsterdam: North-Holland.

[4] Brunnermeier, Markus. 2009. “Deciphering the Liquidity and Credit Crunch 2007-2008.,” Journal of Economic Perspectives, 23(1): 77-100.

[5] Farhi, Emmanuel, and Jean Tirole. 2011. “Bubbly Liquidity,” forthcoming in Review of Economic Studies.

[6] Grossman, Gene, and Noriyuki Yanagawa. 1993. “Asset Bubbles and Endogenous growth,” Journal of Monetary Economics, 31(1): 3-19.

[7] Hellwig, Christian, and Guido Lorenzoni. 2009. “Bubbles and Self- Enforcing Debt,” Econometrica, 77(4): 1137-1164.

[8] Hirano, Tomohiro, and Noriyuki Yanagawa. 2010a. “Asset Bubbles, Endogenous Growth, and Financial Frictions,” Working Paper, CARF-F-223, The University of Tokyo.

[9] Hirano, Tomohiro, and Noriyuki Yanagawa. 2010b. “Financial Institution, Asset Bubbles and Economic Performance,” Working Paper,CARF-F-234, The University of Tokyo.

[10] Holmstrom, Bengt, and Jean Tirole. 1998. “Private and Public Supply of Liquidity,” Journal of Political Economy, 106(1): 1-40.

[11] Kiyotaki, Nobuhiro, 1998. “Credit and Business Cycles,” The Japanese Economic Review, 49(1): 18–35.

[12] Kiyotaki, Nobuhiro, and John Moore. 1997. “Credit Cycles,” Journal of Political Economy, 105(2): 211-248. 18

[13] Kocherlakota, R. Narayana. 1992. “Bubbles and Constraints on Debt Accumulation,” Journal of Economic Theory, 57(1): 245-256.

[14] Kocherlakota, R. Narayana. 2009. “Bursting Bubbles: Consequences and Cures,” University of Minnesota.

[15] Martin, Alberto, and Jaume Ventura. 2010. “Economic Growth with Bubbles,” Universitat Pompeu Fabra.

[16] Martin, Albert, and Jaume Ventura. 2011. “Theoretical Notes on Bubbles and the Current Crisis,” IMF Economic Review, 59(11): 6-40.

[17] Matsuyama, Kiminori. 2007. “Credit Traps and Credit Cycles,” American Economic Review, 97(1): 503-516.

[18] Miao, Jianjun, and Pengfei Wang. 2011. “Bubbles and Credit Constraints,”mimeo, Boston University.

[19] Miller, Marcus, and Joseph Stiglitz. 2010. “Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?,” The Economic Journal, 120(544): 500-518.

[20] Santos, S. Manuel, and MichaelWoodford. 1997. “Rational Asset Pricing Bubbles,” Econometrica, 65(1): 19-58.

[21] Sakuragawa, Masaya. 2012. “Savings and Bubbles,” mimeo, Keio University.

[22] Tirole, Jean. 1982. “On the Possibility of Speculation under Rational Expectations,” Econometrica, 50(5): 1163-1182.

[23] Tirole, Jean. 1985. “Asset Bubbles and Overlapping Generations,”Econometrica, 53(6): 1499-1528.

[24] Ueda, Kazuo. 2011. “Japan’s Deleveraging since the 1990s and the Bank of Japan’s Monetary Policy: Some Comparisons with the U.S. Experience Since 2007,” Working Paper No. CARF-F-259, The University of Tokyo.

[25] Ventura, Jaume. 2011. “Bubbles and Capital Flows,” CREI, Forthcoming in Journal of Economic Theory.

[26] Woodford, Michael. 1990. “Public Debt as Private Liquidity,” American Economic Review, 80(2): 382-388.