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'Irrational exuberance' and capital flows for the US New Economy: a simple global model

  • Marcus Miller
  • Olli Castrén

    (European Central Bank, Germany)

  • Lei Zhang

In a stylized and analytically tractable model of the global economy, we first calculate the Pareto improvement when a country experiencing a favourable supply side shock consumes more against expected future output and spreads the risk by selling shares. With capital inflows to finance the 'New Economy' significantly exceeding the current account deficit, we then show that selling shares globally at inflated prices-due to 'irrational exuberance' and|or distorted corporate incentives-can generate significant international transfers when the asset bubble bursts. Our analysis complements econometric studies showing how much the European economy was affected when the US asset boom ended. Copyright © 2007 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 12 (2007)
Issue (Month): 1 ()
Pages: 89-105

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Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:1:p:89-105
DOI: 10.1002/ijfe.307
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  1. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," NBER Working Papers 11728, National Bureau of Economic Research, Inc.
  2. Giancarlo CORSETTI & Luca DEDOLA & Sylvain LEDUC, 2003. "International Risk-Sharing and the Transmission of Productivity Shocks," Economics Working Papers ECO2003/22, European University Institute.
  3. Tamim Bayoumi & Douglas Laxton & Paolo Pesenti, 2004. "Benefits and spillovers of greater competition in Europe: a macroeconomic assessment," Staff Reports 182, Federal Reserve Bank of New York.
  4. Marcus H. Miller & Paul Weller & Lei Zhang, 2002. "Moral Hazard and the US Stockmarket: Analyzing the "Greenspan Put"," Working Paper Series WP02-1, Peterson Institute for International Economics.
  5. Michael ARTIS & Ana Beatriz C. GALVÃO & Massimiliano MARCELLINO, 2003. "The transmission mechanism in a changing world," Economics Working Papers ECO2003/18, European University Institute.
  6. Eloïc Peyrache & Lucía Quesada, 2011. "Intermediaries, Credibility and Incentives to Collude," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1099-1133, December.
  7. Castrén, Olli & Miller, Marcus & Stiegert, Roger, 2003. "Growth expectations, capital flows and international risk sharing," Working Paper Series 0237, European Central Bank.
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