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Banking bubbles and financial crises

Jianjun Miao () and Pengfei Wang ()

Journal of Economic Theory, 2015, vol. 157, issue C, 763-792

Abstract: This paper develops a tractable 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 bubbles to burst, resulting in a financial crisis. Credit policy can mitigate economic downturns. The welfare gain is larger when the government interventions are more front loaded, given that the government injects the same amount of liquidity in terms of present value. Bank capital requirements can prevent the formation of banking bubbles by limiting leverage, but if too restrictive will lead to less lending and hence lower production.

Keywords: Banking bubbles; Multiple equilibria; Financial crises; Credit policies; Capital requirements (search for similar items in EconPapers)
JEL-codes: E2 E44 G01 G20 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Banking Bubbles and Financial Crisis (2012) Downloads
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DOI: 10.1016/j.jet.2015.02.004

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