Standard international macroeconomic models overpredict capital flows into countries with relatively lower capital stocks and faster-growing TFP. Asymmetric invest- ment risk has been shown in similar models to be a significant driver of capital flows between otherwise symmetric countries. But...

We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of...