The Mechanism of Credit Uncertainty Triggering Bubbles in Asset Prices

Intermediary of banks plays an important role in the purchase of assets. The scale and change of loans determine the asset prices. This paper develops the dynamic model of Allen and Gale, analyzes the relationships between uncertainty of credit and bubbles in asset prices from two aspects. One is uncertainty of loan scale; the other is increasing of loan distribution variance. The results shows that the former will lead to the formation of bubbles and the latter will lead to intensified bubbles. This paper makes policy recommendations considering the results of model and actual cases, that are the central bank should take into account of credit uncertainty on the impact of asset prices in the formulation of monetary policy, prevent and resolve banking crisis by reducing uncertainty.