Chapter

The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account

Aart Kraay and Jaume Ventura

in G7 Current Account Imbalances

Published by University of Chicago Press

Published in print May 2007 | ISBN: 9780226107264
Published online February 2013 | e-ISBN: 9780226107288 | DOI: http://dx.doi.org/10.7208/chicago/9780226107288.003.0012
The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account

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This chapter reports a novel theoretical model that connects present international imbalances and the bursting of the global equity bubble in 2000. Budget deficits constitute a welfare-improving policy response to the collapse of the bubble. They also constitute a beggar-thy-neighbor policy that is responsible for the collapse of the bubble. The presented model crudely but effectively encapsulates conventional views of the U.S. current account deficit. The U.S. government recognizes the beneficial role that bubbly firms play in the world economy. The appearance of a bubble in the U.S. stock market in the second half of the 1990s explains much of the decline in U.S. net foreign assets. The collapse of the stock market in 2000 was the result of a coordination failure or change in investor sentiment, and the rapid expansion of public debt since then served to displace inefficient investments in the same way that the bubble did.

Keywords: bubbly firms; economy; U.S. government; U.S. stock market; global equity bubble; net foreign assets; international imbalances; current account deficit

Chapter.  17032 words.  Illustrated.

Subjects: Financial Markets

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