## Abstract

We develop an overlapping generations model with leveraged investment in speculative asset bubbles. Financial intermediaries use borrowed funds to speculate on a risky asset bubble, which promises high returns as long as it does not collapse. They can, however, default on their debt and shift the losses to lenders when the bubble collapses. This risk shifting leads to welfare-reducing (or “toxic”) rational asset bubbles. We then analyze a set of often discussed policy interventions: pricking bubbles, macroprudential regulations, and leverage restriction.

## Keywords

Rational bubbles Risk shifting Financial crises## JEL Classification

F32 F41 F44## Notes

### Acknowledgments

We thank Jianjun Miao and an anonymous referee for useful comments. We wish to thank our colleagues Gadi Barlevy, Bob Barsky, Craig Burnside, Jeff Campbell, Bill Keech, and Tomohiro Hirano for their suggestions. We also thank the seminar and workshop participants at Duke University, the Federal Reserve Bank of Chicago, the Bank of Japan, the University of Tokyo, the University of Montreal, the Asia Pacific Conference on Economic Dynamics, and the 7th Annual Workshops of the Asian Research Network for their helpful comments. The views expressed in this paper are those of the authors. They should not be interpreted as reflecting the views of the Bank of Japan.

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