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Bubbles and capital flows

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  • Ventura, Jaume

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 phenomena that have been difficult to model before, such as the recurrence and depth of financial crises or their puzzling tendency to propagate across countries.

Suggested Citation

  • Ventura, Jaume, 2012. "Bubbles and capital flows," Journal of Economic Theory, Elsevier, vol. 147(2), pages 738-758.
    • Handle: RePEc:eee:jetheo:v:147:y:2012:i:2:p:738-758
    DOI: 10.1016/j.jet.2011.03.016
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bubbles; International transmission of shocks; Capital flows; Economic growth;
    All these keywords.

    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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