Advertisement

Comparative Economic Studies

, Volume 60, Issue 1, pp 87–104 | Cite as

Credit Growth, Rational Bubbles and Economic Efficiency

  • Xavier Freixas
Article

Abstract

Excessive credit growth and the emergence of bubbles increase the likelihood of a systemic crisis. While no causality between credit growth and systemic crises has been empirically established, it seems reasonable to think that excessive credit growth goes hand in hand with the emergence of bubbles and that it is their bursting that triggers a systemic crisis. This article explores the interaction between the demand for bubbly assets and the supply of credit in a dynamic overlapping generations economy and examines the macroprudential policy implications.

Keywords

Bubbles Credit Supply Systemic Risk Banks Macroprudential regulation 

JEL Classifications

E44 E60 G18 G21 G28 

References

  1. Abel, A.B., N.G. Mankiw, L.H. Summers, and R.J. Zeckhauser. 1989. Assessing dynamic efficiency: theory and evidence. Review of Economic Studies 56: 1–20.CrossRefGoogle Scholar
  2. Allen, Franklin, Stephen Morris, and Andrew Postlewaite. 1993. Finite bubbles with short sale constraints and asymmetric information. Journal of Economic Theory 61: 206–229.CrossRefGoogle Scholar
  3. Anundsen, Andre, Karsten Gerdrup, Frank Hansen, and Kasper Kragh-Sørensen. 2014. Bubbles and crises?: The role of house prices and credit. Journal of Applied Econometrics 31(7): 1099–1255.Google Scholar
  4. Aoki, Kosuke, and Kalin Nikolov. 2015. Bubbles, banks and financial stability. Journal of Monetary Economics 74(C): 33–51.CrossRefGoogle Scholar
  5. Azariadis, C., and B. Smith. 1993. Adverse selection in the overlapping generations model: The case of pure exchange. Journal of Economic Theory 60: 277–305.CrossRefGoogle Scholar
  6. Benes, Jaromir, Michael, Kumhof and Douglas, Laxton. 2014. Financial crises in DSGE models: A prototype model. IMF WP/14/57.Google Scholar
  7. Berger, A., and G. Udell. 2004. The institutional memory hypothesis and the procyclicality of bank lending behavior. Journal of Financial Intermediation 13: 458–495.CrossRefGoogle Scholar
  8. Bernanke, Ben. 1983. Nonmonetary effects of the financial crisis in the propagation of the great depression. American Economic Review 73: 257–76.Google Scholar
  9. Blanchard, Olivier J., and Mark W. Watson. 1982. Bubbles, rational expectations and financial markets. In Crisis in the economic and financial structure: Bubbles, bursts, and shocks, ed. P. Wachtel. Lexington: Lexington Press.Google Scholar
  10. Bordo, Michael D., and Olivier Jeanne. 2002. Monetary policy and asset prices: Does ‘benign neglect’ make sense? International Finance, Summer 5(2): 139–64.CrossRefGoogle Scholar
  11. Borio, Claudio. 2012. The financial cycle and macroeconomics: what have we learnt? BIS Working Papers No 395.Google Scholar
  12. Borio, Claudio, and Philip, Lowe. 2002. Asset prices, financial and monetary stability: Exploring the nexus. BIS Working Papers 114, Bank for International Settlements July.Google Scholar
  13. Brunnermeier, Markus K., and Stefan Nagel. 2004. Hedge funds and the technology bubble. Journal of Finance 59: 2013.CrossRefGoogle Scholar
  14. Brunnermeier, Markus, Andrew Crocket, Charles Goodhart, Avinash D. Persaud, Hyun, Shin. 2009. The fundamental principles of financial regulation, Geneva Reports on the World Economy 11.Google Scholar
  15. Calomiris, C.W., and C.M. Kahn. 1991. The role of demandable debt in structuring optimal banking arrangements. American Economic Review 81(3): 497–513.Google Scholar
  16. Carvalho, Vasco M., Alberto Martin, and Jaume Ventura. 2012. Understanding bubbly episodes. American Economic Review 102(3): 95–100.CrossRefGoogle Scholar
  17. Claessens, Stijn, Ayhan, Kose, and Marco, Terrones. 2008. What happens during recessions, crunches and busts?, IMF Working Papers 08/274, International Monetary Fund December.Google Scholar
  18. Claessens, Stijn, Ayhan Kose, and Marco, Terrones. 2011. Financial cycles: What? How? When? IMF working paper.Google Scholar
  19. Detken, Carsten and Frank, Smets. 2004. Asset price booms and monetary policy, Working Paper Series 0364, European Central Bank May.Google Scholar
  20. Dell’Ariccia, Giovanni, Deniz Igan, Luc, Laeven, and Hui, Tong. 2012. Policies for macrofinancial stability: How to deal with credit booms. IMF Staff Discussion Note 12/06.Google Scholar
  21. Dell’Ariccia, Giovanni, and Robert Marquez. 2006. Lending booms and lending standards. Journal of Finance 61(5): 2511–46.CrossRefGoogle Scholar
  22. Diba, Behzad, and Herschel Grossman. 1988. Explosive rational bubbles in stock prices? American Economic Review 78(3): 520–30.Google Scholar
  23. Drehmann, Mathias, and John Juselius. 2014. Evaluating early warning indicators of banking crises: Satisfying policy requirements. International Journal of Forecasting 30(3): 759–780.CrossRefGoogle Scholar
  24. Farhi, Emmanuel, and Jean Tirole. 2012. Bubbly liquidity. Review of Economic Studies 79(2): 678–706.CrossRefGoogle Scholar
  25. Freixas, Xavier, and David Pérez-Reyna. 2017. Gilded bubbles. Mimeo: Universitat Pompeu Fabra.Google Scholar
  26. Friedman, Milton, and Anna J. Schwartz. 1963. A monetary history of the United States: 1867–1960. Princeton: Princeton University Press.Google Scholar
  27. Froot, Kenneth, and Maurice Obstfeld. 1991. Intrinsic bubbles: The case of stock prices. American Economic Review 81(5): 1189–214.Google Scholar
  28. Gertler, Mark, and Karadi Peter. 2011. A model of unconventional monetary policy. Journal of Monetary Economics 58(1): 17–34.CrossRefGoogle Scholar
  29. Goodhart, Charles, and Boris Hofmann. 2008. House prices, money, credit, and the macroeconomy. Oxford Review of Economic Policy, Spring 24(1): 180–205.CrossRefGoogle Scholar
  30. Hart, O., and J. Moore. 1994. A theory of debt based on the inalienability of human capital. Quarterly Journal of Economics 109: 841–879.CrossRefGoogle Scholar
  31. Helbling, Thomas, F. 2005. Housing price bubbles—a tale based on housing price booms and busts. In Bank for international settlements, 21, 30–41. Real Estate Indicators and Financial Stability, Vol. 21 of BIS Papers chapters, Basel: Bank for International Settlements.Google Scholar
  32. Helbling, Thomas F., and Marco E. Terrones. 2003. Real and financial effects of bursting asset price bubbles. World economic outlook, 61–94. Washington: IMF.Google Scholar
  33. Holmstöm, B., and J. Tirole. 1997. Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics 112(3): 663–691.CrossRefGoogle Scholar
  34. Holmstöm, B., and J. Tirole. 1998. Private and public supply of liquidity. Journal of Political Economy 106: 1–40.CrossRefGoogle Scholar
  35. Jordà, Oscar, Moritz Schularick, and Alan M. Taylor. 2011. Financial crises, credit booms, and external imbalances: 140 years of lessons. IMF Economic Review 59(2): 340–378.CrossRefGoogle Scholar
  36. Jordà, Oscar, Moritz Schularick, and Alan M. Taylor. 2013. When credit bites back. Journal of Money, Credit and Banking 45(s2): 3–28.CrossRefGoogle Scholar
  37. Jordà Òscar, Moritz Schularick and Alan M. Taylor. 2014. The great mortgaging: Housing finance, crises, and business cycles. Working Paper 2050 NBER.Google Scholar
  38. Jordà, Oscar, Moritz Schularick, and Alan M. Taylor. 2015. Leveraged bubbles. Journal of Monetary Economics 76(S): 1–20.CrossRefGoogle Scholar
  39. Kindleberger, C. 1978. Manias, panics and crashes: A history of financial crises. New York: Basic Books.CrossRefGoogle Scholar
  40. Kiyotaki, Nobuhiro, and John Moore. 1997. Credit cycles. Journal of Political Economy 105: 211.CrossRefGoogle Scholar
  41. Kohn, Donald. 2009. Monetary policy research and the financial crisis: Strengths and shortcomings. Speech before the Federal Reserve Conference on Key Developments in Monetary Policy, Washington, DC.Google Scholar
  42. Laeven, Luc, and Fabian, Valencia. 2012. Systemic banking crises database: An update. IMF Working Paper 12/163.Google Scholar
  43. Lown, C., and D.P. Morgan. 2006. The credit cycle and the business cycle: New findings using the survey of senior loan officers. Journal of Money, Credit and Banking 38(6): 1575.CrossRefGoogle Scholar
  44. Maddaloni, Angela, and José-Luis Peydró. 2011. Bank risk-taking, securitization, supervision, and low interest rates: Evidence from the Euro-area and the U.S. lending standards. The Review of Financial Studies 24(6): 2121–2165.CrossRefGoogle Scholar
  45. Martin, Alberto, and Jaume Ventura. 2016. Managing Credit Bubbles. Journal of the European Economic Association 14(3): 753–89.CrossRefGoogle Scholar
  46. Martin, Alberto, and Jaume Ventura. 2012. Economic growth with bubbles. American Economic Review 102(6): 3033–58.CrossRefGoogle Scholar
  47. Matsuyama, Kiminori. 2007. Credit traps and credit cycles. American Economic Review 97(1): 503–516.CrossRefGoogle Scholar
  48. Phillips, P.C.B., Y. Wu, and J. Yu. 2011. Explosive behavior in the 1990s NASDAQ: When did exuberance escalate asset values? International Economic Review 52(1): 201–226.CrossRefGoogle Scholar
  49. Phillips, P.C.B., S. Shi, and J. Yu. 2015. Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500. International Economic Review 56: 1043–1078.CrossRefGoogle Scholar
  50. Reinhart, Carmen, and Kenneth S. Rogoff. 2009. This time is different: Eight centuries of financial folly. Princeton: Princeton University Press.Google Scholar
  51. Schularick, Moritz, and Alan M. Taylor. 2012. Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review 102(2): 1029–1061.CrossRefGoogle Scholar
  52. Smith, Vernon L., Gerry L. Suchanek, and Arlington W. Williams. 1988. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica 56(5): 1119–1151.CrossRefGoogle Scholar
  53. Tirole, Jean. 1985. Asset bubbles and overlapping generations. Econometrica 53(6): 1499–1528.CrossRefGoogle Scholar
  54. Weil, P. 1987. Confidence and the real value of money in an overlapping generations economy. Quarterly Journal of Economics 102: 1–22.CrossRefGoogle Scholar
  55. Woodford, M. 1990. Public debt as private liquidity. American Economic Review 80: 382–388.Google Scholar

Copyright information

© Association for Comparative Economic Studies 2018

Authors and Affiliations

  1. 1.BarcelonaSpain

Personalised recommendations