Working Paper(19-004E) "Growing and collapsing bubbles"

The large fluctuations of asset prices in financial crises are modeled as creditdriven　bubbles, where agency problems in the banking sector raise the asset prices　to unsustainable levels. The peak of a bubble and the timing of its collapse can be　predictable because the bubble collapses when the price hits an endogenous threshold　that is determined by structural parameters. Tighter monetary policy can dampen the　size of the bubble, whereas tighter prudential regulations that cause credit rationing　may exacerbate the bubble. Our theory recommends leaning against the bubbly wind,　rather than screening the borrowers, as a stabilization policy.

Growing and collapsing bubbles （PDF：242KB）