The International Transmission of Credit Bubbles: Theory and Policy

Jaume Ventura and Martín, Alberto
Authors registered in the RePEc Author Service: Alberto Martin

No 10396, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Asset bubbles; Capital controls; Exchange rates; Financial globalization; Interest rates; International capital controls (search for similar items in EconPapers)
JEL-codes: E32 E44 O40 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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Related works:
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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