Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/152893 
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper No. 459
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
In an analytically tractable model of the global economy, we calculate the Pareto improvement where 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, however, we show that selling shares globally at inflated prices – due to ‘irrational exuberance’ and distorted corporate incentives – can generate significant international transfers when the asset bubble bursts. The analysis complements recent econometric studies which appeal to financial factors to explain why the European economy was so strongly affected by the recent US downturn.
Subjects: 
Capital flows
international transmission of shocks
Moral Hazard
JEL: 
F41
F32
G15
Document Type: 
Working Paper

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