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...

We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can...