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The international transmission of credit bubbles: Theory and policy

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  • Martin, Alberto
  • Ventura, Jaume

Abstract

We live in a new world economy characterized by financial globalization, historically low interest rates, and frequent credit booms and busts. To study this world, we extend the rational-bubbles framework of Martin and Ventura (2015) to include many countries and general preferences. We find that financial globalization and low interest rates create an environment that is conducive to credit bubbles. These bubbles raise world savings and generate capital flows that may not be efficient. A global planner would adopt a policy of “leaning-against-investor-sentiment”, taxing credit in those times and countries where credit is excessive and subsidizing it elsewhere. An important characteristic of this policy is that it is expectationally robust, in the sense that it isolates the world economy from fluctuations in investor sentiment. This policy may be hard to implement in a decentralized fashion, though, as individual countries are unlikely to internalize the effects of their policies on the world interest rate.

Suggested Citation

  • Martin, Alberto & Ventura, Jaume, 2015. "The international transmission of credit bubbles: Theory and policy," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 37-56.
  • Handle: RePEc:eee:moneco:v:76:y:2015:i:s:p:s37-s56
    DOI: 10.1016/j.jmoneco.2015.10.002
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    Citations

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    Cited by:

    1. Lise Clain-Chamosset-Yvrard & Takashi Kamihigashi, 2015. "International Transmission of Bubble Crashes in a Two-Country Overlapping Generations," Discussion Paper Series DP2015-43, Research Institute for Economics & Business Administration, Kobe University.
    2. Alberto Martin & Jaume Ventura, 2018. "The Macroeconomics of Rational Bubbles: A User's Guide," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 505-539, August.
    3. Alberto Martín & Enrique Moral-Benito & Tom Schmitz, 2018. "The Financial Transmission of Housing Bubbles: Evidence from Spain," Working Papers 625, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2016. "Monetary policy for a bubbly world," Economics Working Papers 1533, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2019.
    5. repec:eee:jmacro:v:59:y:2019:i:c:p:195-216 is not listed on IDEAS
    6. Clain-Chamosset-Yvrard, Lise & Kamihigashi, Takashi, 2017. "International transmission of bubble crashes in a two-country overlapping generations model," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 115-126.
    7. repec:bis:bisbps:95 is not listed on IDEAS
    8. repec:kap:jrefec:v:56:y:2018:i:4:d:10.1007_s11146-017-9605-4 is not listed on IDEAS
    9. Alberto Martín & Enrique Moral-Benito & Tom Schmitz, 2018. "The Financial Transmission of Housing Bubbles: Evidence from Spain," Working Papers 625, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Pengfei Wang & Jianjun Miao & Feng Dong, 2017. "Asset Bubbles and Monetary Policy," 2017 Meeting Papers 205, Society for Economic Dynamics.
    11. Lise Claini-Chamosset-Yvrard & Takashi Kamihigashi, 2015. "International Transmission of Bubble Crashes: Stationary Sunspot Equilibria in a Two-Country Overlapping Generations Model," Discussion Paper Series DP2015-21, Research Institute for Economics & Business Administration, Kobe University.
    12. Jose Eduardo Gomez-Gonzalez & Juliana Gamboa-Arbeláez & Jorge Hirs-Garzón & Andrés Pinchao-Rosero, 2018. "When Bubble Meets Bubble: Contagion in OECD Countries," The Journal of Real Estate Finance and Economics, Springer, vol. 56(4), pages 546-566, May.
    13. repec:kap:annfin:v:14:y:2018:i:3:d:10.1007_s10436-018-0320-9 is not listed on IDEAS
    14. repec:gam:jeners:v:12:y:2019:i:14:p:2649-:d:247267 is not listed on IDEAS
    15. repec:kap:jrefec:v:54:y:2017:i:3:d:10.1007_s11146-016-9581-0 is not listed on IDEAS
    16. Alberto Martin & Enrique Moral-Benito & Tom Schmitz, 2018. "The financial transmission of housing booms: evidence from Spain," Economics Working Papers 1613, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2019.

    More about this item

    Keywords

    Financial globalization; International capital flows; Sudden stops; Credit bubbles; International policy coordination;

    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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