EconPapers    
Economics at your fingertips  
 

Asset Bubbles and Credit Constraints

Jianjun Miao () and Pengfei Wang ()

American Economic Review, 2018, vol. 108, issue 9, 2590-2628

Abstract: We provide a theory of rational stock price bubbles in production economies with infinitely lived agents. Firms meet stochastic investment opportunities and face endogenous credit constraints. They are not fully committed to repaying debt. Credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium. Stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions. These bubbles command a liquidity premium and raise investment by raising the debt limit. Their collapse leads to a recession and a stock market crash.

JEL-codes: D25 E22 E32 E44 G12 G14 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20160782
References: Add references at CitEc
Citations: View citations in EconPapers (31) Track citations by RSS feed

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aer.20160782 (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... A0q9mbdTI9VW7xicMIx5 (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... dVTZekY0sE7s0PXTSOM6 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

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:aea:aecrev:v:108:y:2018:i:9:p:2590-2628

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().

 
Page updated 2021-06-13
Handle: RePEc:aea:aecrev:v:108:y:2018:i:9:p:2590-2628