Kiel Working Papers, Kiel Institute for World Economics
No 1635:
Credit Bubbles and Land Bubbles
Christopher Reicher
Abstract: In modern macroeconomic models it is difficult to obtain
explosive price bubbles on assets with positive net supply. This paper
shows that it is possible to obtain explosive bubbles in certain situations
when assets such as land are used as collateral and lenders are willing to
lend freely against it. As land prices rise, collateral constraints become
relaxed, and households wish to borrow more. If the financial sector or
government is willing to accommodate this by issuing credit indefinitely,
this can lead to self-fulfilling equilibria where land has a positive,
purely speculative, value. Furthermore, such bubbles need not affect real
allocations in the absence of other market imperfections, even when land is
a factor in production
JEL-Codes: G12,; E52,; E62; (follow links to similar papers)
18 pages, July 2010
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