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Asset bubbles, banking stability and economic growth

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  • Wang, Shengquan
  • Chen, Langnan
  • Xiong, Xiong

Abstract

This paper examines the relationships between the asset bubble and the banking stability from both theoretical and empirical perspectives. The theoretical analysis demonstrates that the moral hazard caused by the deposit insurance and limited liability might facilitate the banks to hold bubble assets for the purpose of risk premium. Meanwhile the supervisory intensity, leverage ratio and credit spread provide the conditions for banks to hold bubble assets through their effects on risk premium. Once the banks hold the bubble assets, their stability will deteriorate because of four types of effects, namely internal leverage, cash withdrawal, credit friction and network effects. This paper also utilizes the BMA-PVAR model to test the theoretical findings by employing the data from 26 representative economies for a period between 2000 and 2014. The empirical evidences are consistent with the theoretical findings that the equity bubbles will lower the banking stability. The empirical evidences also suggest that the banking instability will be detrimental to the economic growth.

Suggested Citation

  • Wang, Shengquan & Chen, Langnan & Xiong, Xiong, 2019. "Asset bubbles, banking stability and economic growth," Economic Modelling, Elsevier, vol. 78(C), pages 108-117.
  • Handle: RePEc:eee:ecmode:v:78:y:2019:i:c:p:108-117
    DOI: 10.1016/j.econmod.2018.08.014
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    More about this item

    Keywords

    Asset bubble; Banking stability; BMA-PVAR; Partial equilibrium model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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