Working Paper

On the neutrality of credit-driven asset bubbles


  • Christopher Reicher
Publication Date

This paper proposes and tests a theory of credit-driven asset bubbles which are neutral in their real effects. When a lender such as a government, central bank, or banking sector is willing to lend infinitely against collateral, explosive asset bubbles can form which exactly offset a bubble in household liabilities. Surprisingly, evidence from a VAR using long-run restrictions supports the idea that asset bubbles are approximately neutral in their real effects before 2007. The evidence becomes more ambiguous if one includes post-2007 data, hinting that the post-2007 degree of comovement between asset prices and output comes from an unusual regime


JEL Classification
G12, E44, E51

Key Words

  • Bubbles
  • collateral constraints
  • conditions
  • fiscal theory of the price level
  • neutrality
  • transversality