IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v108y2018i9p2590-2628.html
   My bibliography  Save this article

Asset Bubbles and Credit Constraints

Author

Listed:
  • Jianjun Miao
  • Pengfei Wang

Abstract

We provide a theory of rational stock price bubbles in production economies with infinitely lived agents. Firms meet stochastic investment opportunities and face endogenous credit constraints. They are not fully committed to repaying debt. Credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium. Stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions. These bubbles command a liquidity premium and raise investment by raising the debt limit. Their collapse leads to a recession and a stock market crash.

Suggested Citation

  • Jianjun Miao & Pengfei Wang, 2018. "Asset Bubbles and Credit Constraints," American Economic Review, American Economic Association, vol. 108(9), pages 2590-2628, September.
    • Handle: RePEc:aea:aecrev:v:108:y:2018:i:9:p:2590-2628
    Note: DOI: 10.1257/aer.20160782
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/aer.20160782
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=_fTPXKl7Jbs9A0q9mbdTI9VW7xicMIx5
    Download Restriction: no
    File URL: https://www.aeaweb.org/articles/attachments?retrieve=i3TNp-89OIxldVTZekY0sE7s0PXTSOM6
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:108:y:2018:i:9:p:2590-2628. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.