Asset Bubbles and Foreign Interest Rate Shocks
Pengfei Wang (),
Jing Zhou and
Jianjun Miao ()
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Jing Zhou: Fudan University
No 221, 2017 Meeting Papers from Society for Economic Dynamics
We provide an inﬁnite-horizon general equilibrium model of a small open economy with both domestic and international ﬁnancial market frictions. Firms face credit constraints and use a bubble asset (land) as collateral to borrow. A land bubble can provide liquidity and relax credit constraints. Low foreign interest rates are conducive to bubble formation. A rise in foreign interest rate can cause the collapse of the asset bubble, which in turn causes an equilibrium regime shift and a sudden stop. Asset bubbles provide an important ampliﬁcation mechanism.
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