Asset bubbles and credit constraints
Files
Published version
Date
2018-09
Authors
Miao, Jianjun
Wang, Pengfei
Version
Published version
OA Version
Citation
Jianjun Miao, Pengfei Wang. 2018. "Asset Bubbles and Credit Constraints." American Economic Review, Volume 108, Issue 9, pp. 2590 - 2628. https://doi.org/10.1257/aer.20160782
Abstract
We provide a theory of rational stock price bubbles in production economies with infinitely lived agents. Firms meet stochastic investment opportunities and face endogenous credit constraints. They are not fully committed to repaying debt. Credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium. Stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions. These bubbles command a liquidity premium and raise investment by raising the debt limit. Their collapse leads to a recession and a stock market crash.
Description
License
Copyright 2019 American Economic Association. All rights reserved.