Two Types of Asset Bubbles in a Small Open Economy

Takashi Kamihigashi and Ryonghun Im
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Ryonghun Im: Faculty of Economics, Kwansei Gakuin University, JAPAN

No DP2022-15, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This paper examines the possibility of two types of rational asset price bubbles in a small open economy. Our model is a simple representative-agent model similar to the Lucas "tree" model except that the economy may be partially or completely open. There are goods, stock asset, pure bubbly asset, and loan markets, and we consider all possible cases depending on whether each of the markets is open or closed. We show that capital inflows give rise to asset bubbles. Moreover, two types of bubbles arise simultaneously in the economy if the goods market and loan markets are open.

Keywords: Stock market bubbles; Pure bubbles; Small open economy (search for similar items in EconPapers)
JEL-codes: E21 E44 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2022-03
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-mac and nep-opm
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