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Bubbles and capital flows

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Author Info
Jaume Ventura

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Abstract

This paper presents a stylized model of international trade and asset price bubbles. Its central insight is that bubbles tend to appear and expand in countries where productivity is low relative to the rest of the world. These bubbles absorb local savings, eliminating inefficient investments and liberating resources that are in part used to invest in high productivity countries. Through this channel, bubbles act as a substitute for international capital flows, improving the international allocation of investment and reducing rate-of-return differentials across countries. This view of asset price bubbles has important implications for the way we think about economic growth and fluctuations. It also provides a simple account of some real world phenomenae that have been difficult to model before, such as the recurrence and depth of financial crises or their puzzling tendency to propagate across countries

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Publisher Info
Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 102.

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Date of creation: 2004
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Handle: RePEc:red:sed004:102

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Related research
Keywords: Asset price bubbles; international capital flows; propagation of shocks; contagion;

Other versions of this item:

Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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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. Olivier, Jacques, 2000. "Growth-Enhancing Bubbles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 133-51, February.
  2. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August. [Downloadable!] (restricted)
  3. Daron Acemoglu & Jaume Ventura, 2002. "The World Income Distribution," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 659-694, May. [Downloadable!] (restricted)
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  4. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  5. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 57-84, February.
  6. Peter Howitt, 2000. "Endogenous Growth and Cross-Country Income Differences," American Economic Review, American Economic Association, vol. 90(4), pages 829-846, September. [Downloadable!] (restricted)
  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  8. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February. [Downloadable!] (restricted)
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  9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November. [Downloadable!] (restricted)
  10. Aart Kraay & Norman Loayza & Luis Serven & Jaume Ventura, 2000. "Country Portfolios," NBER Working Papers 7795, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

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. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2000. "Country portfolios," Economics Working Papers 913, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  2. Aart Kraay & Jaume Ventura, 2005. "The Dot-Com Bubble the Bush Deficits, and the U.S. Current Account," NBER Working Papers 11543, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Romain Ranciere & Aaron Tornell & Frank Westermann, 2004. "Crises and Growth: A Re-evaluation," UCLA Economics Working Papers 832, UCLA Department of Economics. [Downloadable!]
    Other versions:
  4. Philip R. Lane, 2003. "The Macroeconomics of International Financial Trade," Trinity Economics Papers 200314, Trinity College Dublin, Department of Economics. [Downloadable!]
    Other versions:
  5. Christian Hellwig, 2003. "Bubbles and Self-enforcing Debt (October 2006, with Guido Lorenzoni)," UCLA Economics Online Papers 229, UCLA Department of Economics. [Downloadable!]
  6. Emmanuel Farhi & Jean Tirole, 2008. "Competing Liquidities: Corporate Securities, Real Bonds and Bubbles," NBER Working Papers 13955, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Maurice Obstfeld, 2004. "External Adjustment," NBER Working Papers 10843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Christian Hellwig & Guido Lorenzoni, 2006. "Bubbles and Self-enforcing Debt," Levine's Bibliography 321307000000000383, UCLA Department of Economics. [Downloadable!]
    Other versions:
  10. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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