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Bubbles, Banks, and Financial Stability

Author

Listed:
  • Kosuke Aoki

    (Faculty of Economics, University of Tokyo)

  • Kalin Nikolov

    (European Central Bank)

Abstract

This paper asks two main questions: (1) What makes some asset price bubbles more costly for the real economy than others? and (2) When do costly bubbles occur? We construct a model of rational bubbles under credit frictions and show that when bubbles held by banks burst this is followed by a costly financial crisis. In contrast, bubbles held by ordinary savers have relatively muted effects. Banks tend to invest in bubbles when financial liberalisation decreases their profitability.

Suggested Citation

  • Kosuke Aoki & Kalin Nikolov, 2011. "Bubbles, Banks, and Financial Stability," CARF F-Series CARF-F-253, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  • Handle: RePEc:cfi:fseres:cf253
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    JEL classification:

    • 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

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