ECB paper highlights locational importance of asset bubbles


The bursting of an asset bubble has strongly differing effects on the economy, depending on the degree to which banks are exposed to it, according to a working paper published by the European Central Bank on November 16.

Authors Kosuke Aoki and Kalin Nikolov use a model of the economy based on three agents – bankers, entrepreneurs and workers – to test the effect of asset bubbles on different sectors. The paper finds that when banks are heavily exposed to a bubble, the shock is transmitted

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