Capital flows and the US ‘New Economy’: consumption smoothing and risk exposure
In an analytically tractable model of the global economy, we calculate the Pareto improvement where 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, however, we show that selling shares globally at inflated prices – due to ‘irrational exuberance’ and distorted corporate incentives – can generate significant international transfers when the asset bubble bursts. The analysis complements recent econometric studies which appeal to financial factors to explain why the European economy was so strongly affected by the recent US downturn. JEL Classification: F41, F32, G15
|Date of creation:||Mar 2005|
|Contact details of provider:|| Postal: 60640 Frankfurt am Main, Germany|
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ana Beatriz Galvão & Michael Artis & Massimiliano Marcellino, 2007.
"The transmission mechanism in a changing world,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 22(1), pages 39-61.
- Michael ARTIS & Ana Beatriz C. GALVÃO & Massimiliano MARCELLINO, 2003. "The transmission mechanism in a changing world," Economics Working Papers ECO2003/18, European University Institute.
- Artis, Michael J & Galvão, Ana Beatriz C & Marcellino, Massimiliano, 2003. "The Transmission Mechanism in a Changing World," CEPR Discussion Papers 4014, C.E.P.R. Discussion Papers.
- Castrén, Olli & Miller, Marcus & Stiegert, Roger, 2003. "Growth expectations, capital flows and international risk sharing," Working Paper Series 0237, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20050459. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications)
If references are entirely missing, you can add them using this form.