Theory of Asset Price Bubbles and its Effects on Macro-economy

This dissertation investigates how asset price bubbles arise in the modern macroeconomic theory. The first chapter is related to the existence condition of asset price bubbles and its dynamic stability. Asset price bubbles have been widely considered as an economically fragile phenomenon. Specifically, in a wide variety of models with asset price bubbles, there exists a continuum of bubbly equilibrium that converges to a bubble-less steady state, and there is a unique bubbly equilibrium converging to a bubbly steady state. This paper shows that if the agents' risk aversion is sufficiently low, a standard model with asset price bubbles generates a bubbly steady state where all bubbly equilibria converge to the bubbly steady state. In other words, the bubbly steady state is dynamically stable. The stable bubble arises when asset price bubbles create strong crowding-in effects through the net worth effect, while the crowding-out effects by bubbles through the equilibrium interest rate rise are relatively limited. The second chapter investigates a mechanism in which a burst of asset bubbles induces financial panic and bank run. In an economy with heterogeneous investment opportunities and financial constraints, a bubble asset, defined as an asset with intrinsically no fundamental value, can have a positive price in the equilibrium, because the positive price is supported by the liquidity premium. In such a circumstance, bubble asset prices strongly correlate with the banking sector's liquidity premium. The price correlation helps provide ample liquidity during periods of financial distress. Consequently, all depositors anticipate no bank run phenomenon even under financial distress. However, once bubbles burst, the role of liquidity provision suddenly disappears. As a result, depositors anticipate a severe liquidity shortage in the banking sector. Combined with excessive leverage in the bubble economy, the bank's liquidation value at a fire sale price could be below the debt amount, prompting depositors to choose the bank's liquidation.