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‘Irrational exuberance’ and capital flows for the US New Economy: a simple global model
Author(s) -
Miller Marcus,
Castrén Olli,
Zhang Lei
Publication year - 2007
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.307
Subject(s) - economics , stylized fact , irrational number , asset (computer security) , boom , shock (circulatory) , monetary economics , current account , capital (architecture) , capital flows , economy , macroeconomics , microeconomics , exchange rate , medicine , history , profit (economics) , geometry , mathematics , computer security , archaeology , environmental engineering , computer science , engineering
In a stylized and analytically tractable model of the global economy, we first calculate the Pareto improvement when a country experiencing a favourable supply side shock consumes more against expected future output and spreads the risk by selling shares. With capital inflows to finance the ‘New Economy’ significantly exceeding the current account deficit, we then show that selling shares globally at inflated prices—due to ‘irrational exuberance’ and/or distorted corporate incentives—can generate significant international transfers when the asset bubble bursts. Our analysis complements econometric studies showing how much the European economy was affected when the US asset boom ended. Copyright © 2007 John Wiley & Sons, Ltd.