Bubbles and Credit Constraints

Pengfei Wang and Jianjun Miao

No 94, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2011
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Working Paper: Bubbles and Credit Constraints (2011)
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