RIEB, Kobe University

International Transmission of Bubble Crashes: Stationary Sunspot Equilibria 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 types of stationary sunspot equilibria. The first type of equilibrium assumes that only the foreign country receives a sunspot shock, while the second type assumes that both countries independently receive sunspot shocks. In the first type of equilibrium, a bubble crash due to a sunspot shock in the foreign country inevitably causes the home bubble to burst. In the second type of equilibrium, the effect of a bubble crash in the foreign country on the home bubble can be positive or negative. In both types of equilibria, a bubble crash in the foreign country necessarily transmits to the home country.