TY - JOUR
T1 - Capital Bubbles, Interest Rates, and Investment in a Small Open Economy
AU - Kikuchi, Tomoo
AU - Thepmongkol, Athakrit
N1 - Publisher Copyright:
© 2020 The Ohio State University
PY - 2020/12
Y1 - 2020/12
N2 - We model a bubble in a productive asset (capital) on an explosive path, which diverges from the fundamental equilibrium and bursts with a positive probability. When the bubble grows, the small open economy borrows from the the world economy to finance investment and production, and banks charge the risk of the bubble bursting as an interest rate spread to debtors. Consequently, the interest rate spread widens as loans are increasingly backed by the bubble. When the bubble bursts, defaults cause a sudden stop of credit inflow from the world economy, investment falls, and the interest rate spread vanishes.
AB - We model a bubble in a productive asset (capital) on an explosive path, which diverges from the fundamental equilibrium and bursts with a positive probability. When the bubble grows, the small open economy borrows from the the world economy to finance investment and production, and banks charge the risk of the bubble bursting as an interest rate spread to debtors. Consequently, the interest rate spread widens as loans are increasingly backed by the bubble. When the bubble bursts, defaults cause a sudden stop of credit inflow from the world economy, investment falls, and the interest rate spread vanishes.
KW - default risk
KW - financial crisis
KW - financial regulation
KW - interest rate spreads
KW - rational bubbles
KW - small open economy
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U2 - 10.1111/jmcb.12723
DO - 10.1111/jmcb.12723
M3 - Article
AN - SCOPUS:85090158699
VL - 52
SP - 2085
EP - 2109
JO - Journal of Money, Credit and Banking
JF - Journal of Money, Credit and Banking
SN - 0022-2879
IS - 8
ER -