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Federal Reserve Bank of Richmond
Working Paper
Asset Bubbles and Global Imbalances
Daisuke Ikeda
Toan Phan
Abstract

We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of bubbles in the North. Bubbles in the North in turn facilitate South-to-North capital flows. The model can simultaneously explain several stylized features of recent bubble episodes.


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Daisuke Ikeda & Toan Phan, Asset Bubbles and Global Imbalances, Federal Reserve Bank of Richmond, Working Paper 18-7, 23 Mar 2018.
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Keywords: Rational bubbles; global imbalances; financial frictions; credit boom
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