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Globalization and financial development: A model of the Dot-Com and the Housing Bubbles

  • Basco, Sergi

In the last decade the United States experienced the burst of the Dot-Com and the Housing Bubbles. I develop a model to study the relationship between globalization and the emergence of rational bubbles. I also analyze how the effect of globalization on house prices depends on the type of bubble. I show that bubbles cannot arise in a financially developed country in autarky. In contrast, as globalization progresses, bubbles are more likely to appear in the financially developed country. I also show that house prices increase with globalization only when the bubble is attached to houses. This prediction is consistent with empirical evidence for U.S. metropolitan areas.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 92 (2014)
Issue (Month): 1 ()
Pages: 78-94

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Handle: RePEc:eee:inecon:v:92:y:2014:i:1:p:78-94
DOI: 10.1016/j.jinteco.2013.10.008
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  1. Óscar Arce & David López-Salido, 2011. "Housing Bubbles," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 212-41, January.
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  8. Laibson, David I. & Mollerstrom, Johanna Britta, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Scholarly Articles 4686766, Harvard University Department of Economics.
  9. Martin, Alberto & Ventura, Jaume, 2010. "Economic Growth with Bubbles," CEPR Discussion Papers 7770, C.E.P.R. Discussion Papers.
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  11. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of Global Imbalances and Low Interest Rates," 2006 Meeting Papers 894, Society for Economic Dynamics.
  12. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
  13. Ricardo Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2004. "Speculative Growth: Hints from the US Economy," NBER Working Papers 10518, National Bureau of Economic Research, Inc.
  14. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  15. Ventura, Jaume, 2012. "Bubbles and capital flows," Journal of Economic Theory, Elsevier, vol. 147(2), pages 738-758.
  16. 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.
  17. Jaume Ventura & Aart Kraay, 2005. "The dot-com bubble, the Bush deficits and the US current account," Economics Working Papers 847, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2005.
  18. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
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  27. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
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  30. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  31. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
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