Bubbles and Credit Constraints
37 Pages Posted: 7 Mar 2011
There 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: Suggested Citation