Reference

Jianjun Miao (University of Boston), “Bubbles and Credit Constraints”, Fédération des Banques Françaises Seminar, TSE, November 21, 2011, 12:30–13:45, room MF 323.

Abstract

We provide an infinite-horizon model of a production economy with credit-driven 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.

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