Working Paper: NBER ID: w9304
Authors: Jaume Ventura
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 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: No keywords provided
JEL Codes: F15; F36; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asset price bubbles (G19) | Absorption of local savings (E21) |
| Absorption of local savings (E21) | Elimination of inefficient investments (G11) |
| Elimination of inefficient investments (G11) | Reallocation of resources to high-productivity countries (F16) |
| Reallocation of resources to high-productivity countries (F16) | Improvement of international investment landscape (F21) |
| Improvement of international investment landscape (F21) | Reduction of rate-of-return differentials across countries (F29) |
| Reallocation of resources to high-productivity countries (F16) | Raising global growth rates (F62) |
| Bubbles (E32) | Amplification of effects of productivity shocks on investment (E22) |
| Bubbles (E32) | Dampening of effects of productivity shocks on consumption (F62) |