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...

The stylized fact for economies experiencing financial crises, that slow economic reform is followed by persistent stagnation, is usually explained as follows: Forbearance policy (i.e., an implicit subsidy to inefficient sectors) distorts resource allocation and causes a supply shortage of...

We construct a monetary model of financial crises that can explain two characteristic features of the global financial crisis in 2008/2009, namely, the widespread freeze of asset transactions and a sharp contraction in aggregate output. We assume that the assets, such as real estate, work as...