Asset Price Bubbles and Their Implications on Monetary Policy

Abstract

Globalisation is the most over-powering and inevitable multi-dimensional phenomenon newlinewhich has socio-eco-politico implications. It has linked far-fetched countries and made newlinegeographical boundaries meaningless. The process of globalisation set into motion the newlinefinancial liberalisation of economies which resulted into integration of the financial newlinemarkets across the globe. As a result of this, Emerging Market Economies (EME s) have newlinereceived tremendous Global Capital Flows (GCF s) from developed economies. The newlineGCF s started in the 1970 s with the fall of the Bretton Woods System and continues to newlineinundate EME s creating a rich area for, researchers and academicians to debate and newlineanalyse the causes and merits and demerits of GCF s. Calvo, et al., (1996) distinguish two newlinebroad reasons for attracting GCF s to an economy internal and external reasons. Internal newlinereasons entail attractiveness of an economy (growth potential, political and financial newlinestability and superior financial returns offered to investors) while push factors were newlinecategorised as external reasons. Ghosh, et al., (2014) found a high proportion of newlinesynchronisation of GCF s across financial markets and therefore pointed out the dominant newlinerole of push factors in the receipt of capital flows to an economy. Financial Contagion is a newlinephenomenon that stems out of global push factors and refers to the spill over of negative newlineimpacts caused by inflows and outflows of GCF s. It is financial contagion that resulted in newlinethe global financial crisis of 2008, due to which economies across the globe experienced a newlineliquidity crunch. The role of financial linkages and various transmission channels in the newlinespread of crisis was examined by Blanchard, et al., (2010) and Dungey, et al., (2013). newlineThe existence of global push factors in determining the quantum and direction of GCF s is newlinea cause of concern, since it holds the underlying danger of a rapid reversal of GCF s newlineresulting into a negative impact on the economy. Cardarelli, et al., (2010) examined newlineinstances of large capital inflows a