Bubbles and Credit Constraints
Pengfei Wang () and
Jianjun Miao ()
No 94, 2011 Meeting Papers from Society for Economic Dynamics
We provide an infinite-horizon model of a production economy with bubbles, in which firms meet stochastic investment opportunties 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 eventually. We show that there is a credit policy that can eliminate the bubble on firm assets and can achieve the efficient allocation.
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