The international transmission of credit bubbles:theory and policy

Alberto Martin and Jaume Ventura

May 2015

Abstract

We live in a new world economy characterized by …financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic e¤ects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to include many countries and general preferences, and uses it to study how …financial integration a¤ects the properties of credit bubbles, how the latter are transmitted across countries, and the role of international policy coordination.

JEL classification: E32, E44, O40

Keywords: …financial globalization, international capital ‡flows, sudden stops, credit bubbles, international policy coordination