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Asset bubbles and sudden stops in a small open economy

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Abstract

We live in a new world economy characterized by financial globalization and historically low interest rates. This paper presents a simple analytical framework that helps us understand how this new world economy works from the perspective of an emerging economy. Financial globalization gives rise to episodes of large capital inflows followed by sudden stops. Low international interest rates give rise to asset bubbles that pop and burst. The analysis provides novel answers to old questions: What are the effects of asset bubbles on capital flows and macroeconomic performance? How do these effects vary in normal times and during sudden stops? How should policymakers manage capital flows in this new environment?

Suggested Citation

  • Alberto Martin & Jaume Ventura, 2014. "Asset bubbles and sudden stops in a small open economy," Economics Working Papers 1466, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1466
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    References listed on IDEAS

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    1. Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, vol. 101(7), pages 3400-3426, December.
    2. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
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    Cited by:

    1. Jianjun Miao & Pengfei Wang & Jing Zhou, 2022. "Asset Bubbles and Foreign Interest Rate Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 315-348, April.
    2. Claudio Raddatz & Diego Saravia & Jaume Ventura, 2015. "Global Liquidity, Spillovers to Emerging Markets and Policy Responses: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.),Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 1, pages 001-011, Central Bank of Chile.

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    More about this item

    Keywords

    financial globalization; international capital flows; sudden stops; asset bubbles; capital controls.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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