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Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View

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  • Gunther Schnabl
  • Andreas Hoffmann

Abstract

Abstract 'Capitalism without failure is like religion without sin'. Charles Kindleberger's book Manias, Panics and Crashes points out that speculation and crises have always been present: the world economic crisis of the 20th century, the South Sea bubble in the 18th century, and the tulip mania in the first part of the 17th century. Starting with the Japanese bubble in the 1980s we take the reader on a tour through 20 years of bubbles in emerging markets and industrial countries which have recently culminated in the 2007/08 US subprime market crisis. We explain the global stock market and real estate booms based on the real and monetary overinvestment theories of Hayek, Wicksell and Schumpeter, arguing that ample liquidity supply originating in the large industrialised countries has contributed - independent from the exchange rate regime - to overinvestment cycles in new and emerging markets around the globe. The policy implication is to keep interest rates not too low for too long in response to bursting bubbles. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal World Economy.

Volume (Year): 31 (2008)
Issue (Month): 9 (09)
Pages: 1226-1252

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Handle: RePEc:bla:worlde:v:31:y:2008:i:9:p:1226-1252

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References

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  1. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, December.
  2. Peter Backé & Balázs Égert, 2006. "Credit Growth in Central and Eastern Europe: New (Over)Shooting Stars?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
  3. Ronald McKinnon & Gunther Schnabl, 2006. "China's Exchange Rate and International Adjustment in Wages, Prices and Interest Rates: Japan Déjà Vu?," CESifo Economic Studies, CESifo, vol. 52(2), pages 276-303, June.
  4. Gerhard Illing, 2001. "Financial Fragility, Bubbles and Monetary Policy," CESifo Working Paper Series 449, CESifo Group Munich.
  5. Greiber, Claus & Setzer, Ralph, 2007. "Money and housing: evidence for the euro area and the US," Discussion Paper Series 1: Economic Studies 2007,12, Deutsche Bundesbank, Research Centre.
  6. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, 08.
  7. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  8. Richard Herring & Susan Wachter, . "Bubbles in Real Estate Markets," Zell/Lurie Center Working Papers 402, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  9. Gunther Schnabl, 2009. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," Open Economies Review, Springer, vol. 20(4), pages 565-587, September.
  10. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, vol. 32(1), pages 70-91, March.
  11. Michael M. Hutchison & Takatoshi Ito & Frank Westermann, 2005. "The Great Japanese Stagnation: Lessons for Industrial Countries," EPRU Working Paper Series 05-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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  1. Global Rebalancing: A Modest Role for the RMB
    by Shifting Wealth in ShiftingWealth on 2011-05-18 12:42:00
  2. Four Reasons Why The EXIT Will Fail
    by Mario Rizzo in Think Markets on 2009-11-10 02:46:02
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