The International Transmission of Credit Bubbles: Theory and Policy

• Authors: Jaume Ventura and Alberto Martin.
• Journal of Monetary Economics

We live in a new world economy characterized by Financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic e§ects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic e§ects of these credit bubbles. This paper extends that framework to include many countries and general preferences, and uses it to study how Önancial integration a§ects the properties of credit bubbles, how the latter are transmitted across countries, and the role of international policy coordination.