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.
Published: Emmanuel Farhi & Jean Tirole, 2012. "Bubbly Liquidity," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 678-706.
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