RIEB Discussion Paper Series No.2022-15

Title

Two Types of Asset Bubbles in a Small Open Economy

Abstract

This paper examines the possibility of two types of rational asset price bubbles in a small open economy. Our model is a simple representative-agent model similar to the Lucas "tree" model except that the economy may be partially or completely open. There are goods, stock asset, pure bubbly asset, and loan markets, and we consider all possible cases depending on whether each of the markets is open or closed. We show that capital inflows give rise to asset bubbles. Moreover, two types of bubbles arise simultaneously in the economy if the goods market and loan markets are open.

Keywords

Stock market bubbles; Pure bubbles; Small open economy

JEL Classification

E21, E44

Inquiries

Takashi KAMIHIGASHI
Research Institute for Economics and Business Administration(RIEB)
Center for Computational Social Science (CCSS)
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059

Ryonghun IM
Faculty of Economics, Kwansei Gakuin University