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Growing and collapsing bubbles

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  • Keiichiro Kobayashi

Abstract

The large fluctuations of asset prices in financial crises are modeled as creditdriven bubbles, where agency problems in the banking sector raise the asset prices to unsustainable levels. The peak of a bubble and the timing of its collapse can be predictable because the bubble collapses when the price hits an endogenous threshold that is determined by structural parameters. Tighter monetary policy can dampen the size of the bubble, whereas tighter prudential regulations that cause credit rationing may exacerbate the bubble. Our theory recommends leaning against the bubbly wind, rather than screening the borrowers, as a stabilization policy.

Suggested Citation

  • Keiichiro Kobayashi, 2019. "Growing and collapsing bubbles," CIGS Working Paper Series 19-004E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:19-004e
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    References listed on IDEAS

    as
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