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Asset bubbles and frictional intermediation

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  • Chenxi Wang

    (Renmin University of China)

Abstract

I study the impact of intermediation friction on asset bubbles in an infinite horizon model where rational asset bubbles serve as store of value and collateral. Intermediation friction is characterized from two aspects, the interest rate spread and the loan-to-deposit ratio, which affect the existence of bubbles, its steady-state size and its dynamics in different ways. The impact of intermediation friction depends on the role of asset bubbles in the economy. When asset bubbles only serve as store of value (collateral), higher intermediation friction not only raises the value of bubble assets and social welfare in the steady state, but also amplifies (dampens) the fluctuation after the bubble collapses, undermining (improving) the stability of the economy. When both roles are involved, the impact of intermediation friction depends on the relative importance of the two roles. An optimal level of intermediation friction can be derived when the relative importance is within some intermediate range. The roles of asset bubbles also matter for the impact of monetary policies.

Suggested Citation

  • Chenxi Wang, 2023. "Asset bubbles and frictional intermediation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 921-961, October.
    • Handle: RePEc:spr:joecth:v:76:y:2023:i:3:d:10.1007_s00199-022-01482-w
    DOI: 10.1007/s00199-022-01482-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset bubble; Financial friction; Store of value; Collateral; Financial intermediary; Monetary policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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