International transmission of bubble crashes in a two-country overlapping generations model |
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Affiliation: | 1. Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM and EHESS, France;2. Research Institute for Economics and Business Administration (RIEB), Kobe University, Japan |
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Abstract: | We study the international transmission of bubble crashes by analyzing stationary sunspot equilibria in a two-country overlapping generations exchange economy with stochastic bubbles. We consider two cases of sunspot shocks. In the first case, we assume that only the foreign country receives a sunspot shock, while in the second, we assume that both countries independently receive sunspot shocks. In the first case, a bubble crash in the foreign country is always accompanied by a bubble crash in the home country. In the second case, a bubble crash in the foreign country can have a positive or negative effect on the home bubble. We also show that there exists a unique locally isolated stationary sunspot equilibrium, and that it is locally unstable. |
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Keywords: | International transmission Stochastic bubbles Stationary sunspot equilibria Financial integration |
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