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Endogenous current account balances in a world CGE model with international financial assets

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  • Lemelin, André
  • Robichaud, Véronique
  • Decaluwé, Bernard

Abstract

This paper presents an applied computable general equilibrium world model with financial assets and endogenous current account, and capital and financial account balances. The capital and financial account equilibrium conditions, rather than exogenous rules, constrain the current account balance. International capital flows which balance the current account are constrained by supply-and-demand equilibrium conditions on the market for international debt securities, under portfolio managers' optimizing behavior. The asset–liability structure of the financial portfolio is endogenous, and it is possible for a country-agent to have negative net financial assets. In simulations, the interaction of portfolio choices with trade supply and demand behavior leads to endogenous sign reversals in some current account balances, and it results in a different allocation of investment among regions, compared to a model with exogenously determined current account balances. In the reference scenario, this allocation generates growth that is about the same globally, but differently distributed between regions.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 146-160

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:146-160

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: World CGE model; International investment position; Current account balances; Capital and financial account;

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References

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  1. André Lemelin, 2008. "Trade and the External Wealth of Nations," Cahiers de recherche 0814, CIRPEE.
  2. André Lemelin, 2009. "Commerce et flux financiers internationaux : MIRAGE-D," Working Papers 2009-27, CEPII research center.
  3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
  4. Maurice Obstfeld, 2012. "Does the Current Account Still Matter?," NBER Working Papers 17877, National Bureau of Economic Research, Inc.
  5. Lawrence H. Goulder & Barry Eichengreen, 1988. "Savings Promotion, Investment Promotion, and International Competitiveness," NBER Working Papers 2635, National Bureau of Economic Research, Inc.
  6. Hübler, Michael, 2011. "Technology diffusion under contraction and convergence: A CGE analysis of China," Energy Economics, Elsevier, vol. 33(1), pages 131-142, January.
  7. Ianchovichina, Elena & Robert McDougall & Thomas W. Hertel, 2000. "A Disequilibrium Model of International Capital Mobility," GTAP Working Papers 399, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  8. Warwick J. McKibbin & Andrew Stoeckel, 2009. "Modelling the global financial crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 581-607, Winter.
  9. Jung, Hong-Sang & Thorbecke, Erik, 2003. "The impact of public education expenditure on human capital, growth, and poverty in Tanzania and Zambia: a general equilibrium approach," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 701-725, November.
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