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Bubbles and Credit Constraints

Author

Listed:
  • Pengfei Wang

    (Hong Kong University of Science and Tech)

  • Jianjun Miao

    (Boston University)

Abstract

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.

Suggested Citation

  • Pengfei Wang & Jianjun Miao, 2011. "Bubbles and Credit Constraints," 2011 Meeting Papers 94, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:94
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    References listed on IDEAS

    as
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    More about this item

    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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