Bubbles and Capital Flows

Jaume Ventura

No 3657, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper presents a stylized model of international trade and asset price bubbles. Its central insight is that bubbles tend to appear and expand in countries where productivity is low relative to the rest of the world. These bubbles absorb local savings, eliminating inefficient investments and liberating resources that are in part used to invest in high productivity countries. Through this channel, bubbles act as a substitute for international capital flows, improving the international allocation of investment and reducing rate-of-return differentials across countries. This view of asset price bubbles has important implications for the way we think about economic growth and fluctuations. It also provides a simple account of some real world phenomenae that have been difficult to model before, such as the recurrence and depth of financial crises or their puzzling tendency to propagate across countries.

Keywords: Asset price bubbles; International capital flows (search for similar items in EconPapers)
JEL-codes: F15 F36 F43 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (27)

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Related works:
Working Paper: Bubbles and capital flows (2004)
Working Paper: Bubbles and Capital Flows (2002)
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