Banking Bubbles and Financial Crisis

Jianjun Miao () and Pengfei Wang ()

No WP2012-010, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: This paper develops a macroeconomic model with a banking sector in which banks face endogenous borrowing constraints. There is no uncertainty about economic fundamentals. Banking bubbles can emerge through a positive feedback loop mechanism. Changes in household confidence can cause the collapse of bubbles, resulting in a financial crisis. Credit policy can mitigate economic downturns but also incur an efficiency loss. Bank capital requirements can prevent the formation of banking bubbles by limiting leverage. But a too restrictive requirement leads to less lending and hence less production.

Keywords: Banking Bubble; Multiple Equilibria; Financial Crisis; Self-ful?lling Prophecy; Credit Policy; Capital Requirements; Borrowing Constraints (search for similar items in EconPapers)
JEL-codes: E2 E44 G01 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
Date: 2012-01
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