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Bubbles and capital flows

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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 could eventually provide 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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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 846.

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Date of creation: Oct 2002
Date of revision: Mar 2010
Handle: RePEc:upf:upfgen:846

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Web page: http://www.econ.upf.edu/

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Keywords: Asset price bubbles; international capital flows;

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  1. 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, University of Chicago Press, vol. 66, pages 467.
  2. Alberto Martin, 2010. "Economic Growth with Bubbles," 2010 Meeting Papers, Society for Economic Dynamics 788, Society for Economic Dynamics.
  3. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 14-88, Wharton School Rodney L. White Center for Financial Research.
  4. Grossman, G.M. & Yanagawa, N., 1992. "Asset Bubbles and Endogenous Growth," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 160, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(1), pages 79-104, August.
  6. Peter Howitt, 2000. "Endogenous Growth and Cross-Country Income Differences," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 829-846, September.
  7. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1499-1528, November.
  8. Daron Acemoglu & Jaume Ventura, 2001. "The World Income Distribution," NBER Working Papers 8083, National Bureau of Economic Research, Inc.
  9. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2005. "Country Portfolios," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(4), pages 914-945, 06.
  10. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 133-51, February.
  11. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 57-84, February.
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