Next Article in Journal
A Cropping System for Resource-Constrained Urban Agriculture: Lessons from Cape Town
Next Article in Special Issue
Board Attributes and Corporate Social Responsibility Disclosure: A Meta-Analysis
Previous Article in Journal
Moving Urban Sculptures towards Sustainability: The Urban Sculpture Planning System in China
Previous Article in Special Issue
Incorporating Sustainability Considerations into Lending Decisions and the Management of Bad Loans: Evidence from Greece
Open AccessArticle

Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints

1
School of Economics, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan 430074, China
2
School of Economics, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai 200433, China
*
Author to whom correspondence should be addressed.
Sustainability 2018, 10(12), 4803; https://doi.org/10.3390/su10124803
Received: 17 November 2018 / Revised: 9 December 2018 / Accepted: 13 December 2018 / Published: 16 December 2018
(This article belongs to the Special Issue Sustainable Finance)
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. View Full-Text
Keywords: sustainable financial market; asset bubbles; overlapping generation (OLG) model; market interest rate; credit constraints; pledgeability; financial regulation and supervision sustainable financial market; asset bubbles; overlapping generation (OLG) model; market interest rate; credit constraints; pledgeability; financial regulation and supervision
Show Figures

Figure 1

MDPI and ACS Style

Yang, Q.; Lang, Y.; Xu, C. Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints. Sustainability 2018, 10, 4803.

Show more citation formats Show less citations formats
Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Article Access Map by Country/Region

1
Search more from Scilit
 
Search
Back to TopTop