Globalization and financial development: A model of the Dot-Com and the Housing Bubbles

In the last decade the United States experienced the burst of the Dot-Com and the Housing Bubbles. I develop a model to study the relationship between globalization and the emergence of rational bubbles. I also analyze how the effect of globalization on house prices depends on the type of bubble. I show that bubbles cannot arise in a financially developed country in autarky. In contrast, as globalization progresses, bubbles are more likely to appear in the financially developed country. I also show that house prices increase with globalization only when the bubble is attached to houses. This prediction is consistent with empirical evidence for U.S. metropolitan areas. •Framework to understand effect of globalization on the emergence of rational bubbles•Show rational bubbles cannot appear in a financially developed country in autarky•Possibility of bubbles in financially developed country increases with globalization.•Globalization raises house prices in Housing Bubbles episodes, no asset price bubbles.•Confirm the most salient prediction of the model using U.S. metropolitan area data