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Asset bubbles, collateral, and policy analysis

Author

Listed:
  • Miao, Jianjun
  • Wang, Pengfei
  • Zhou, Jing

Abstract

This paper provides a theory of credit-driven asset bubbles in an infinite-horizon production economy. Entrepreneurs face idiosyncratic investment distortions and credit constraints. An intrinsically useless asset such as land serves as collateral for borrowing. A land bubble can form because land commands a liquidity premium. The land bubble can provide liquidity and relax credit constraints, but can also generate inefficient overinvestment. Its net effect is to reduce welfare. Property taxes, Tobin's taxes, macroprudential policy, and credit policy can prevent the formation of a land bubble.

Suggested Citation

  • Miao, Jianjun & Wang, Pengfei & Zhou, Jing, 2015. "Asset bubbles, collateral, and policy analysis," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 57-70.
    • Handle: RePEc:eee:moneco:v:76:y:2015:i:s:p:s57-s70
    DOI: 10.1016/j.jmoneco.2015.08.004
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