The bursting of an asset bubble has strongly differing effects on the economy, depending on the degree to which banks are exposed to it, according to a working paper published by the European Central Bank on November 16.

Authors Kosuke Aoki and Kalin Nikolov use a model of the economy based on three agents – bankers, entrepreneurs and workers – to test the effect of asset bubbles on different sectors. The paper finds that when banks are heavily exposed to a bubble, the shock is transmitted