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Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints
- Source :
- Sustainability, Vol 10, Iss 12, p 4803 (2018), Sustainability, Volume 10, Issue 12
- Publication Year :
- 2018
- Publisher :
- MDPI AG, 2018.
-
Abstract
- Recently, China has witnessed a continuously increasing Debt-to-GDP ratio and a vigorously expanding shadow banking sector. Housing prices hovering at a high level seriously affect the lives of ordinary residents. Disappointingly, a variety of activities such as intense deleveraging campaigns and tight monetary controls produce little effect. Why do these seemingly rightful implementations hardly work? What should governments do to stop the incessant expansion of asset bubbles? What role ought financial supervisors to play in regulating credit markets and facilitating a sustainable and inclusive economic growth? This paper sets off from the pledgeability of asset bubbles and constructs a generalized overlapping generation (OLG) model incorporating financial frictions and collateral constraints, in order to explore the bubble evolution under the alterations of market interest rates and credit conditions. The results show a unique bubble equilibrium, in which the steady-state bubble size expands when interest rate increases. Numerical results further reveal that the bubble-inflation effect of a higher interest rate is reinforced by a more stringent collateral constraint. Our research contributes to an explanation of the inefficacy of present policies and provides the following policy implications: The combination of an interest rate elevation and a strong loan restriction is in fact undesirable for suppressing asset bubbles. Not merely does it strike productivity and capital formation, but it also fosters investors to hold more risky assets to solve liquidity shortage under constrained borrowing capacity.
- Subjects :
- Collateral
media_common.quotation_subject
Geography, Planning and Development
lcsh:TJ807-830
lcsh:Renewable energy sources
Monetary economics
Management, Monitoring, Policy and Law
credit constraints
financial regulation and supervision
overlapping generation (OLG) model
Order (exchange)
0502 economics and business
pledgeability
Economics
Asset (economics)
050207 economics
Constraint (mathematics)
lcsh:Environmental sciences
media_common
lcsh:GE1-350
050208 finance
Renewable Energy, Sustainability and the Environment
asset bubbles
lcsh:Environmental effects of industries and plants
05 social sciences
market interest rate
sustainable financial market
Market liquidity
Interest rate
lcsh:TD194-195
Loan
Deleveraging
Subjects
Details
- Language :
- English
- ISSN :
- 20711050
- Volume :
- 10
- Issue :
- 12
- Database :
- OpenAIRE
- Journal :
- Sustainability
- Accession number :
- edsair.doi.dedup.....aff7591bfa9c467c5cd7f64c4889d736