Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/320115 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11894
Publisher: 
CESifo GmbH, Munich
Abstract: 
We construct a model of bubbles where an asset can be used as collateral primarily due to higher-order uncertainty: while both a lender and a borrower know that the intrinsic value of the asset is low, they may still believe that a "greater fool" exists who will purchase it at a much higher price. We show that such bubbles can lead to inefficient overinvestment under certain conditions. Using this framework, we also examine the impacts of macroprudential policies, as well as other regulatory measures such as interest rate hikes and the resolution of uncertainty.
Subjects: 
collateral
higher-order uncertainty
speculative bubbles
JEL: 
D82
D83
D84
E44
E52
G12
G14
Document Type: 
Working Paper
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