Credit Growth, Rational Bubbles and Economic Efficiency

Excessive credit growth and the emergence of bubbles increase the likelihood of a systemic crisis. While no causality between credit growth and systemic crises has been empirically established, it seems reasonable to think that excessive credit growth goes hand in hand with the emergence of bubbles and that it is their bursting that triggers a systemic crisis. This article explores the interaction between the demand for bubbly assets and the supply of credit in a dynamic overlapping generations economy and examines the macroprudential policy implications.