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Bubbles and Credit Constraints

  • Pengfei Wang

    (Hong Kong University of Science and Tech)

  • Jianjun Miao

    (Boston University)

We provide an infinite-horizon model of a production economy with bubbles, in which firms meet stochastic investment opportunties 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 eventually. We show that there is a credit policy that can eliminate the bubble on firm assets and can achieve the efficient allocation.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 94.

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Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:94
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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