Working Paper

Asset Bubbles and Global Imbalances

Abstract: We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of bubbles in the North. Bubbles in the North in turn facilitate South-to-North capital flows. The model can simultaneously explain several stylized features of recent bubble episodes.

Keywords: Rational bubbles; global imbalances; financial frictions; credit boom;

JEL Classification: F32; F41; F44;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2018-03-23

Number: 18-7

Pages: 46 pages