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| Financial Development, Asset Bubble and the Real Economy: A Survey |
| WANG Yongqin, GAO Xin, YUAN Zhigang, DU Julan
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School of Economics, Fudan University;
Economics Department, Mannheim University;
Economics Department, Chinese University of Hong Kong |
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Abstract Recent financial crises have propelled economists to reflect on the relationship between asset bubble and the real economy. Last few years have seen an emerging strand of literature on this. This paper surveys these developments with a unified framework. Asset bubble affects the efficiency and the volatility of the real economy. Financial development plays a crucial role in these relationships. Financial development affects theemergence of asset bubble. Asset bubble can either “crowd in” or “crowd out” real investments. Quality of institutions will reinforce the effects of financial development. Financial development and institutional quality also affect the flow of capital in an open economy, leading to more complex effects on the growth and volatility of the real economy. This paper is particularly relevant for emerging economies with financial underdevelopment that are facing financial liberalization and structural changes. The survey ends up with some policy implications for China’s financial development and reform.
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Received: 30 October 2014
Published: 12 April 2018
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