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'Irrational exuberance' and capital flows for the US New Economy: a simple global model

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Author Info
Marcus Miller
Olli Castrén (European Central Bank, Germany)
Lei Zhang

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Abstract

In a stylized and analytically tractable model of the global economy, we first calculate the Pareto improvement when a country experiencing a favourable supply side shock consumes more against expected future output and spreads the risk by selling shares. With capital inflows to finance the 'New Economy' significantly exceeding the current account deficit, we then show that selling shares globally at inflated prices-due to 'irrational exuberance' and|or distorted corporate incentives-can generate significant international transfers when the asset bubble bursts. Our analysis complements econometric studies showing how much the European economy was affected when the US asset boom ended. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.307
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 12 (2007)
Issue (Month): 1 ()
Pages: 89-105
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Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:1:p:89-105

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Web page: http://www.interscience.wiley.com/jpages/1076-9307/

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," NBER Working Papers 11728, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Artis, Michael J & Galvão, Ana Beatriz C & Marcellino, Massimiliano, 2003. "The Transmission Mechanism in a Changing World," CEPR Discussion Papers 4014, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Tamim Bayoumi & Douglas Laxton & Paolo Pesenti, 2004. "Benefits and spillovers of greater competition in Europe: a macroeconomic assessment," Staff Reports 182, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  4. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2004. "International Risk Sharing and the Transmission of Productivity Shocks," CEPR Discussion Papers 4746, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Marcus Miller & Paul Weller & Lei Zhang, 2002. "Moral Hazard and the US Stock Market: Analysing the "Greenspan Put"," Economic Journal, Royal Economic Society, vol. 112(478), pages C171-C186, March. [Downloadable!] (restricted)
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  6. Marcus H. Miller & Olli Castren & Roger Stiegert, 2003. "Growth expectations; capital flows and international risk sharing," Working Paper Series 237, European Central Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcus Miller & Lei Zhang, 2006. "Capital Flows, Interest Rates and Precautionary Behaviour: a model of "global imbalances"," WEF Working Papers 0014, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
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