Paper #1466

Title:

Asset bubbles and sudden stops in a small open economy

Authors:

Alberto Martin and Jaume Ventura

Date:

September 2014

Abstract:

We live in a new world economy characterized by financial globalization and historically low interest rates. This paper presents a simple analytical framework that helps us understand how this new world economy works from the perspective of an emerging economy. Financial globalization gives rise to episodes of large capital inflows followed by sudden stops. Low international interest rates give rise to asset bubbles that pop and burst. The analysis provides novel answers to old questions: What are the effects of asset bubbles on capital flows and macroeconomic performance? How do these effects vary in normal times and during sudden stops? How should policymakers manage capital flows in this new environment?

Keywords:

financial globalization, international capital flows, sudden stops, asset bubbles, capital controls.

JEL codes:

E32, E44, O40

Area of Research:

Macroeconomics and International Economics

Published in:

Radatz, C., Saravia, D. and Ventura, J. (Eds.), Global Liquidity, Spillovers to Emerging Markets, and Policy Responses, Central Bank of Chile, 315-341, 2014

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