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Bubbles, banks and financial stability

Listed author(s):
  • Aoki, Kosuke
  • Nikolov, Kalin

The macroeconomic impact of rational bubbles in a limited commitment economy crucially depends on whether banks or ordinary savers hold the bubble. Banks hold the bubble asset when their leverage is high, when long-term real interest rates are low or when lax supervision allows them to enjoy high deposit insurance subsidies. When banks are the bubble-holders, this amplifies the output boom by reducing loan–deposit rate spreads while the bubble survives but also deepens the recession when the bubble bursts. In contrast, the real impact of bubbles held by ordinary savers is more muted.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393215000616
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 74 (2015)
Issue (Month): C ()
Pages: 33-51

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Handle: RePEc:eee:moneco:v:74:y:2015:i:c:p:33-51
DOI: 10.1016/j.jmoneco.2015.05.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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