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An Equilibrium Model of "Global Imbalances" and Low Interest Rates

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  • Ricardo J. Caballero
  • Emmanuel Farhi
  • Pierre-Olivier Gourinchas

Abstract

The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. (JEL: E44, F21, F31, F32)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 358-93

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:358-93

Note: DOI: 10.1257/aer.98.1.358
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  1. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5573, C.E.P.R. Discussion Papers.
  2. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  3. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
  4. Chinn, Menzie David & Frankel, Jeffrey A., 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," Center for Global, International and Regional Studies, Working Paper Series, Center for Global, International and Regional Studies, UC Santa Cruz qt6p4215w1, Center for Global, International and Regional Studies, UC Santa Cruz.
  5. Jeffrey A. Frankel & Eduardo A. Cavallo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality," NBER Working Papers 10957, National Bureau of Economic Research, Inc.
  6. David E. Weinstein & Christian Broda, 2004. "Globalization And The Gains From Variety," Econometric Society 2004 Latin American Meetings, Econometric Society 327, Econometric Society.
  7. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6149, C.E.P.R. Discussion Papers.
  8. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
  9. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  10. Blanchard, Olivier & Giavazzi, Francesco & Sa, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4888, C.E.P.R. Discussion Papers.
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  12. Menzie D. Chinn & Hiro Ito, 2005. "Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut"," NBER Working Papers 11761, National Bureau of Economic Research, Inc.
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  21. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech, Board of Governors of the Federal Reserve System (U.S.) 77, Board of Governors of the Federal Reserve System (U.S.).
  22. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  23. Ju, Jiandong & Wei, Shang-Jin, 2006. "A Solution to Two Paradoxes of International Capital Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5981, C.E.P.R. Discussion Papers.
  24. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The most important Budget number
    by chris dillow in Stumbling and Mumbling on 2009-04-22 16:51:13
  2. Global imbalances and sliding dollar, is the US doomed?
    by Economic Logician in Economic Logic on 2008-03-14 18:33:00
  3. Another case for plan B
    by chris dillow in Stumbling and Mumbling on 2011-07-27 13:31:10
  4. Was fiscal policy too tight in the boom?
    by chris dillow in Stumbling and Mumbling on 2009-11-23 14:54:34
  5. Global Imbalances: Links to Economic and Financial Stability
    by Guest Author in the big picture on 2011-02-21 15:09:05
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