Asset bubbles and bailouts

Tomohiro Hirano, Masaru Inaba, Noriyuki Yanagawa

Research output: Contribution to journalArticlepeer-review


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.
Original languageEnglish
Pages (from-to)S71-S89
Number of pages19
JournalJournal of Monetary Economics
Issue numberSupplement
Early online date9 Oct 2015
Publication statusPublished - Dec 2015

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