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Bubbles and Credit Constraints

Author

Listed:
  • Jianjun Miao

    () (Department of Economics, Boston University, CEMA, Central University of Finance and Economics, and AFR, Zhejiang University)

  • PENGFEI WANG

    () (Department of Economics, Hong Kong University of Science and Technology, ClearWater Bay, Hong Kong.)

Abstract

We provide an infinite-horizon model of a production economy with credit-driven stock- price bubbles, in which firms meet stochastic investment opportunities and face credit constraints. Capital is not only an input for production, but also serves as collateral. We show that bubbles on this reproducible asset may arise, which relax collateral constraints and improve investment efficiency. The collapse of bubbles leads to a recession and a stock market crash. We show that there is a credit policy that can eliminate the bubble on firm assets and can achieve the efficient allocation.

Suggested Citation

  • Jianjun Miao & PENGFEI WANG, 2011. "Bubbles and Credit Constraints," Boston University - Department of Economics - Working Papers Series WP2011-031, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2011-031
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    More about this item

    Keywords

    Credit-driven bubbles; Collateral Constraints; Credit Policy; Asset Price; Arbitrage; Q Theory; Liquidity; Multiple Equilibria;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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