02387cas a2200253 a 4500 AALejournalIMF014455 230101c9999 xx r poo 0 0eng d 5.00 USD 9781498307666 1018-5941 BD-DhAAL BD-DhAAL Martin, Alberto. Managing Credit Bubbles / Alberto Martin, Jaume Ventura. Washington, D.C. : International Monetary Fund, 2014. 1 online resource (51 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades off these two effects and maximizes long-run output and consumption. The 'equilibrium' bubble size depends on investor sentiment, however, and it typically does not coincide with the 'optimal' bubble size. This provides a new rationale for macroprudential policy. A lender of last resort can replicate the 'optimal' bubble by taxing credit when the "equilibrium" bubble is too high, and subsidizing credit when the 'equilibrium' bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it. Mode of access: Internet Ventura, Jaume. IMF Working Papers; Working Paper ; No. 2014/095 Full text available on IMF http://elibrary.imf.org/view/journals/001/2014/095/001.2014.issue-095-en.xml IMF e-Library