Bubbly Credit Cycles

76 Pages Posted: 6 Dec 2022 Last revised: 19 Dec 2023

See all articles by Haozhou Tang

Haozhou Tang

Dongbei University of Finance and Economics

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn; National University of Singapore (NUS), Department of Economics

Date Written: December 13, 2023

Abstract

Canonical macroeconomic and financial models require credit to be equal to its fundamental component, i.e., the net present value of the net flows to creditors. Per this conventional view, credit booms are expected to precede increased flows to creditors. However, data suggests otherwise. To rationalize the novel empirical findings, we develop a model with financial frictions and heterogeneous firms, allowing for the existence of credit bubbles. We show that a positive credit bubble shock raises the aggregate credit and output while depressing the credit’s fundamental component through firms’ precautionary savings.

Keywords: Rational Bubbles, Heterogeneous Firms, Financial Frictions

JEL Classification: D92, E32, E44

Suggested Citation

Tang, Haozhou and Zhang, Donghai, Bubbly Credit Cycles (December 13, 2023). Available at SSRN: https://ssrn.com/abstract=4285318 or http://dx.doi.org/10.2139/ssrn.4285318

Haozhou Tang

Dongbei University of Finance and Economics ( email )

Dalian
China

Donghai Zhang (Contact Author)

Institute for Macroeconomics and Econometrics - University of Bonn ( email )

Bonn
Germany

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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