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Working Papers

March 2018, No. 18-07

Asset Bubbles and Global Imbalances

Daisuke Ikeda and Toan Phan

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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