Gilded Bubbles

David Perez-Reyna and Xavier Freixas
Additional contact information
Xavier Freixas: Universitat Pompeu Fabra

No 1482, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Excessive credit growth and high asset prices increase the probability of a crisis. Because these two variables are determined in equilibrium, the analysis of systemic risk and the cost-benefit analysis of macroprudential regulation requires a specific framework consistent with the empirical observation. We argue that an overlapping generation model of rational bubbles can explain some of the main features of banking crises and, therefore, provide a microfounded framework for the rigorous analysis of macroprudential policy. We find that credit financed bubbles may have a role as a buffer in reducing excessive investiment at the firms' level and, thus, increasing efficiency. Still, when banks have a risk of going bankrupt a trade-off appears between financial stability and efficiency. When this is the case, macroprudential policy has a key role in improving efficiency while preserving financial stability.

Date: 2017
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2017/paper_1482.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1482

Access Statistics for this paper

More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().