Speaker: Zhiwei Xu, Peking University HSBC Business School
Time: 14:00 - 15:00, October 19 (Tue)
Venue: Room 323, Zhonghui Building, Shipai Campus
We provide a theory to investigate the implications of time-varying bailout policy for rational bubbles in an infinite-horizon production economy. In particular, we ask two questions. First, should the government bail out asset bubbles? Second, if yes, how? In our model, entrepreneurs face idiosyncratic investment opportunity and financial frictions. Intrinsically useless assets can alleviate firms' credit constraint and enhance investment efficiency with additional liquidity. However, asset bubbles are vulnerable to market sentiment and resource-consuming. The systematic risk of bubble bursting causes both asset price volatility and economic fluctuations. In the presence of this tradeoff, we examine the efficiency and the welfare implications of the time-varying bailout policy. We find that the optimal bailout policy is leaning against the wind, striking a balance between the crowding-in and crowding-out effect.
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