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Asset Bubbles and Global Imbalances

59 Pages Posted: 16 Aug 2013 Last revised: 17 Dec 2015

Toan Phan

University of North Carolina (UNC) at Chapel Hill; Federal Reserve Banks - Federal Reserve Bank of Richmond

Daisuke Ikeda

Bank of England

Date Written: November 30, 2015

Abstract

We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two open economies. An asymmetry in frictions in the credit markets causes capital to flow upstream from the South to the North. Capital inflows to the North in turn facilitate the emergence of bubbles that further exacerbate global imbalances. The collapse of these bubbles, however, precipitates a readjustment in capital flows, debt deleveraging, and sharp contractions in economic activities. The model can simultaneously explain several stylized features of recent boom-bust episodes.

Keywords: rational bubble, financial friction, global imbalances, credit boom

JEL Classification: F30, F41, E44

Suggested Citation

Phan, Toan and Ikeda, Daisuke, Asset Bubbles and Global Imbalances (November 30, 2015). Available at SSRN: https://ssrn.com/abstract=2310811 or http://dx.doi.org/10.2139/ssrn.2310811

Toan Phan (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

Chapel Hill, NC NC 27514
United States

HOME PAGE: http://toanphan.org

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Daisuke Ikeda

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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