Canonical macroeconomic and financial models require credit to be equal to its fundamental component, i.e., the net present value of the net flows to creditors. Per this conventional view, credit booms are expected to precede increased flows to creditors. However, data suggests otherwise. To...

This study generalizes a standard heterogeneous firm model with endogenous entry and exit by allowing for asset bubbles. We highlight the selection effect of bubbles that incentivizes low-productivity firms to enter or remain in the market. We show that a rise in the aggregate bubble can boost...