On the neutrality of credit-driven asset bubbles

Christopher Phillip Reicher

No 1679, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper proposes and tests a theory of credit-driven asset bubbles which are neutral in their real effects. When a lender such as a government, central bank, or banking sector is willing to lend infinitely against collateral, explosive asset bubbles can form which exactly offset a bubble in household liabilities. Surprisingly, evidence from a VAR using long-run restrictions supports the idea that asset bubbles are approximately neutral in their real effects before 2007. The evidence becomes more ambiguous if one includes post-2007 data, hinting that the post-2007 degree of comovement between asset prices and output comes from an unusual regime.

Keywords: Bubbles; fiscal theory of the price level; collateral constraints; neutrality; transversality conditions (search for similar items in EconPapers)
JEL-codes: E44 E51 G12 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1679

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