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Marcus Miller

1 June 2003
WORKING PAPER SERIES - No. 237
Details
Abstract
Over the past decades, cross-border financial flows have increased in importance and have in many occasions exceeded the underlying current account positions. This phenomenon has been accompanied by an increase in the volume of international equity transactions that accentuate the role of international risk sharing as a factor for the macroeconomic response to shocks. We use a stylised two-bloc, two-period model of the global economy, with a simple stochastic productivity shock affecting only one country. Efficient global risk-sharing imply that expected productivity gains in one country will attract equity inflows in excess of those needed to finance the current account. Upward-biased expectations about prospects for the productivity gains can further increase the risk exposure of foreign shareholders. The model is calibrated to show how ex post market losses ­ whether due to "normal" stock market downturn or ex ante over-optimism ­ are distributed and how they affect global consumption and current account positions. The results suggest that international spillover effects of stock market bubbles can contribute to business cycle synchronisation across economic areas.
JEL Code
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
G15 : Financial Economics→General Financial Markets→International Financial Markets
30 March 2005
WORKING PAPER SERIES - No. 459
Details
Abstract
In an analytically tractable model of the global economy, we calculate the Pareto improvement where a country experiencing a favourable supply side shock consumes more against expected future output and spreads the risk by selling shares. With capital inflows to finance the"New Economy" significantly exceeding the current account deficit, however, we show that selling shares globally at inflated prices - due to "irrational exuberance" and distorted corporate incentives - can generate significant international transfers when the asset bubble bursts. The analysis complements recent econometric studies which appeal to financial factors to explain why the European economy was so strongly affected by the recent US downturn.
JEL Code
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
G15 : Financial Economics→General Financial Markets→International Financial Markets