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

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  • Andreas Hoffmann
  • Gunther Schnabl

Abstract

Credit booms have globally fuelled hikes in stock, raw material and real estate markets which have culminated in the recent US subprime market crisis. We explain the global asset market booms since the mid 1980s based on the overinvestment theories of Hayek, Wicksell and Schumpeter. We argue that ample liquidity supply originating in the large industrialized countries has contributed to overinvestment cycles in Japan, East Asia, the new markets in the industrial countries and many emerging market economies. Expansionary monetary policies in response to the burst of bubbles are argued to have contributed to vagabonding bubbles around the globe.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-09/cesifo1_wp2100.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2100.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2100

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Keywords: bubbles; boom-bust cycles; Hayek; Wicksell; Schumpeter; emerging markets; capital flows; overinvestment theories;

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References

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  1. Richard Herring & Susan Wachter, . "Bubbles in Real Estate Markets," Zell/Lurie Center Working Papers, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania 402, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  2. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  3. Gunther Schnabl, 2009. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," Open Economies Review, Springer, Springer, vol. 20(4), pages 565-587, September.
  4. Egert, Balázs & Backé, Peter & Zumer, Tina, 2006. "Credit growth in Central and Eastern Europe: new (over)shooting stars?," Working Paper Series, European Central Bank 0687, European Central Bank.
  5. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers, Stanford University, Department of Economics 03001, Stanford University, Department of Economics.
  6. Michael M. Hutchison & Takatoshi Ito & Frank Westermann, 2005. "The Great Japanese Stagnation: Lessons for Industrial Countries," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 05-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  7. 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, CESifo, vol. 52(2), pages 276-303, June.
  8. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262133350, December.
  9. Gerhard Illing, 2001. "Financial Fragility, Bubbles and Monetary Policy," CESifo Working Paper Series 449, CESifo Group Munich.
  10. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, Elsevier, vol. 32(1), pages 70-91, March.
  11. 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.
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  1. Four Reasons Why The EXIT Will Fail
    by Mario Rizzo in Think Markets on 2009-11-10 02:46:02
  2. Global Rebalancing: A Modest Role for the RMB
    by Shifting Wealth in ShiftingWealth on 2011-05-18 12:42:00
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