Why are bubbles harmful to the economy? According to a recent literature on rational bubbles, the problem is the burst that causes a misallocation of funds and triggers a recession. This paper proposes a theory of rational ...

Gu, Mattesini, and Wright (2016) show that credit is irrelevant in a monetary economy with permanent buyer and seller types. In particular, the size of debt limits do not matter for the determination of real allocations. ...