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Asset Bubbles & Global Imbalances

  • Daisuke Ikeda
  • Toan Phan

We introduce asymmetry in financial frictions into a two-country growth model with overlapping generations, by assuming that the South faces more severe financial frictions than the North. We show that this asymmetry causes capital to flow upstream from South to North, thus explaining the so called global imbalances. More importantly, we show that capital inflows from the South enable a rational bubble to emerge in the North, despite that a Northern bubble could never emerge if the North were a closed economy. Furthermore, the bubble is inefficient as it crowds out global investment in Northern capital, and the bubble reduces steady state welfare in both North and South. Our model formalizes the idea that a 'savings glut' flowing from financially underdeveloped emerging economies into the U.S. fueled the boom of a subprime mortgage bubble in the 2000s.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2013-041.

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Length: 31 pages
Date of creation: 20 Dec 2013
Date of revision:
Handle: RePEc:ipg:wpaper:2013-041
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  1. Ricardo J Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An equilibrum model of "global imbalances" and low interest rates," BIS Working Papers 222, Bank for International Settlements.
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  3. Tomohiro Hirano & Noriyuki Yanagawa, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," CIRJE F-Series CIRJE-F-752, CIRJE, Faculty of Economics, University of Tokyo.
  4. Gourinchas, Pierre-Olivier & Rey, Hélène, 2013. "External Adjustment, Global Imbalances and Valuation Effects," CEPR Discussion Papers 9566, C.E.P.R. Discussion Papers.
  5. repec:oup:restud:v:79:y:2012:i:2:p:678-706 is not listed on IDEAS
  6. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  7. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 1-19.
  8. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
  9. Ricardo J. Caballero & Arvind Krishnamurthy, 2009. "Global Imbalances and Financial Fragility," NBER Working Papers 14688, National Bureau of Economic Research, Inc.
  10. Daisuke Ikeda, 2013. "Monetary Policy and Inflation Dynamics in Asset Price Bubbles," Bank of Japan Working Paper Series 13-E-4, Bank of Japan.
  11. Martin, Alberto & Ventura, Jaume, 2010. "Economic Growth with Bubbles," CEPR Discussion Papers 7770, C.E.P.R. Discussion Papers.
  12. Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," TSE Working Papers 09-101, Toulouse School of Economics (TSE), revised Feb 2011.
  13. 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.
  14. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1243-1259.
  15. Hirano, Tomohiro & Yanagawa, Noriyuki, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," MPRA Paper 24085, University Library of Munich, Germany.
  16. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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