Credit Growth, Rational Bubbles and Economic Efficiency

It has been shown empirically that 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 is devoted to explore the different links between the demand for bubbly assets and the supply of credit and their impact on the emergence of rational bubbles in a dynamic over- lapping generations economy. We argue that this framework should allow to analyze some key trade-offs of macroprudential policy and assess the impact of some of the classical micro and macroprudential instruments.