The International Transmission of Credit Bubbles: Theory and Policy

Jaume Ventura and Alberto Martin

No 20933, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to two-country setting and studies the channels through which credit bubbles are transmitted across countries. We find that there are two main channels that work through the interest rate and the terms of trade. The former constitutes a negative spillover, while the latter constitutes a negative spillover in the short run but a positive one in the long run. We study both cooperative and noncooperative policies in this world. The interest-rate and terms-of-trade spillovers produce policy externalities that make the noncooperative outcome suboptimal.

JEL-codes: E32 E44 O40 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-cba, nep-cta, nep-mac, nep-mon and nep-opm
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Published as Martin, Alberto & Ventura, Jaume, 2015. "The international transmission of credit bubbles: Theory and policy," Journal of Monetary Economics, Elsevier, vol. 76(S), pages S37-S56.

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Journal Article: The international transmission of credit bubbles: Theory and policy (2015)
Working Paper: The International Transmission of Credit Bubbles: Theory and Policy (2015)
Working Paper: The International Transmission of Credit Bubbles: Theory and Policy (2015)
Working Paper: The international transmission of credit bubbles: theory and policy (2015)
Working Paper: The international transmission of credit bubbles: theory and policy (2015)
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