Working Paper

Credit Bubbles and Land Bubbles

Kiel Working Papers, 1635

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.

Author

Christopher Reicher

Info

Publication Date
JEL Classification
G12, E52, E62