American Economic Review Vol. 108 No. 9 2018

Asset Bubbles and Credit Constraints

Jianjun Miao¹; Pengfei Wang²

¹ Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, CICFS, Southwestern University of Finance and Economics, CEMA, Central University of Finance and Economics (email: ) · ² Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong (email: )

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.

DOI

10.1257/aer.20160782

Volume

108

Issue

9

Pages

2590-2628

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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