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Bubbles and Credit Constraints

Jianjun Miao () and Pengfei Wang ()

No WP2011-031, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We provide an infinite-horizon model of a production economy with credit-driven stock- price bubbles, in which firms meet stochastic investment opportunities 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 and a stock market crash. We show that there is a credit policy that can eliminate the bubble on firm assets and can achieve the efficient allocation.

Keywords: Credit-driven bubbles; Collateral Constraints; Credit Policy; Asset Price; Arbitrage; Q Theory; Liquidity; Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: E2 E44 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2011-01
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