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Bubbles, banks and financial stability

  • Aoki, Kosuke
  • Nikolov, Kalin

We build a model of rational bubbles in a limited commitment economy and show that the impact of the bubble on the real economy crucially depends on who holds the bubble. When banks are the bubble-holders, this amplifies the output boom 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. JEL Classification:

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Paper provided by European Central Bank in its series Working Paper Series with number 1495.

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Date of creation: Nov 2012
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Handle: RePEc:ecb:ecbwps:20121495
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