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Bubbles, the U.S. Interest Policy, and the Impact on Global Economic Growth: Reverse Growth Effects of Lower Interest Rates after Bubble Bursting

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  • Atsushi Motohashi

    (Kyoto University)

Abstract

This study analyzes the impact of the U.S. interest rate policy on the global economy. We extend the literature and build a global model consisting of a large country (the U.S.) and many small countries to investigate the mechanism by which economic growth and asset prices accelerate rapidly after a U.S. interest rate reduction. Specifically, we show that a U.S. interest rate reduction not only increases economic growth rates but also expands asset bubbles as long as the bubbles exist in small open economies. We also show, however, that this low interest rate policy has a large side effect, that is, a collapse of the asset bubbles causes a larger drop in the growth rate of small open countries than that in the case without a lower interest rate. This conclusion implies that small countries need to be prepared for overheated asset prices associated with U.S. interest policies.

Suggested Citation

  • Atsushi Motohashi, 2020. "Bubbles, the U.S. Interest Policy, and the Impact on Global Economic Growth: Reverse Growth Effects of Lower Interest Rates after Bubble Bursting," KIER Working Papers 1041, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:1041
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset Bubbles; U.S. Interest Rate Policy; Economic Growth; Collapse of Asset Bubbles; Asset Prices;
    All these keywords.

    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
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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