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  3. American Economic Review
  4. September 2018
  5. Asset Bubbles and Credit Constraints

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Asset Bubbles and Credit Constraints

  • Jianjun Miao
  • Pengfei Wang
American Economic Review
vol. 108, no. 9, September 2018
(pp. 2590–2628)
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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.

Citation

Miao, Jianjun, and Pengfei Wang. 2018. "Asset Bubbles and Credit Constraints." American Economic Review, 108 (9): 2590–2628. DOI: 10.1257/aer.20160782

Additional Materials

JEL Classification

  • D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
  • E22 Investment; Capital; Intangible Capital; Capacity
  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading