Revisiting the Real Effects of Asset Price Bubbles: A Balance Sheet Perspective

Fantcho JE and Ngouan PK

Published on: 2026-02-28

Abstract

This paper investigates the real economic consequences of asset price bubbles through a balance sheet lens. We argue that the macroeconomic impact of speculative bubbles critically depends on the distribution of asset holdings across sectors, with banks playing a central role. During bubble expansions, rising asset valuations strengthen banks’ balance sheets by increasing earnings, equity, and capital buffers, thereby supporting credit growth and temporarily stimulating aggregate demand. Conversely, bubble collapses trigger abrupt balance sheet contractions. Sharp declines in asset prices erode bank capital, constrain lending capacity, and reduce credit availability, leading to declines in investment, production, and overall economic activity. Using econometric techniques, we quantify bank-level responses to speculative bubbles. Our analysis shows that during expansionary phases, the total assets of the largest banks increase on average by US$360.5 billion, whereas during severe downturns, they decline by US$291.3 billion. These results underscore the pivotal role of balance sheet channels in transmitting financial exuberance-and its reversal-to the real economy. The findings have important implications for macroprudential regulation and the design of policies aimed at mitigating the real effects of financial cycles.