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Bubbles, banks and financial stability

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  • Nikolov, Kalin
  • Aoki, Kosuke

Abstract

We build a model of rational bubbles in a limited commitment economy and show that the impact of the bubble on the real economy crucially depends on who holds the bubble. When banks are the bubble-holders, this ampli?es the output boom while the bubble survives but also deepens the recession when the bubble bursts. In contrast, the real impact of bubbles held by ordinary savers is more muted. JEL Classification: E

Suggested Citation

  • Nikolov, Kalin & Aoki, Kosuke, 2012. "Bubbles, banks and financial stability," Working Paper Series 1495, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20121495
    Note: 288883
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Stability;

    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

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