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Economic Brief

Jan. 8, 2020

Richmond Fed Research Links Capital Flows to Asset Bubbles

The Richmond Fed’s latest Economic Brief concludes that capital flows from emerging markets to developed economies can contribute to the formation of bubbles in asset prices, such as the U.S. housing boom of the early 2000s.

Interpreting the housing boom and bust through the lens of the researchers’ model, capital inflows from emerging economies, such as China, contributed to falling interest rates in the United States, which in turn helped fuel the emergence of a bubble in housing. The growth in housing wealth prompted U.S. businesses and consumers to take on additional debt until the bubble burst, slowing capital inflows from emerging economies and depressing the U.S. economy.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on economic issues and trends. Sign up to receive an email notification when a new essay is posted.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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