RIEB, Kobe University

International Transmission of Bubble Crashes in a Two-Country Overlapping Generations Model

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.