Bubbles and Credit Constraints

37 Pages Posted: 7 Mar 2011

See all articles by Jianjun Miao

Jianjun Miao

Boston University - Department of Economics

Pengfei Wang

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2011

Abstract

We provide an infinite-horizon model of a production economy with 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. We show that there is a credit policy that can eliminate the bubble on firm assets and can achieve the efficient allocation.

Keywords: Bubbles, Collateral Constraints, Credit Policy, Asset Price, Arbitrage, Q Theory, Liquidity

JEL Classification: E44;G12;G18

Suggested Citation

Miao, Jianjun and Wang, Pengfei, Bubbles and Credit Constraints (March 6, 2011). Available at SSRN: https://ssrn.com/abstract=1779503 or http://dx.doi.org/10.2139/ssrn.1779503

Jianjun Miao (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

Pengfei Wang

affiliation not provided to SSRN

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