DP15197 Bubbles against Financial Repression

Author(s):	Guillaume Plantin
Publication Date:	August 2020
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JEL(s):
Programme Areas:	Financial Economics, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15197

During a financial crisis, a central bank temporarily subsidizes the interest rate so as to maintain borrowing at normal levels. Savers may search for yield and blow rational stochastic bubbles that generate a higher expected return than the policy rate before bursting at the end of monetary easing. Unlike standard rational bubbles, that are not monetary phenomena, these bubbles are "bad" in the sense that they crowd out investments that would otherwise generate a higher expected return than that on the bubbles.