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Capital liberalization and the US external imbalance

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  • Prades, Elvira
  • Rabitsch, Katrin
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    Abstract

    Differences in financial systems are often named as a prime candidate for the current state of global imbalances. This paper focuses on cross-country heterogeneity in access to international financial markets that derives from the presence of capital controls and argues that the process of capital liberalization over the past decades can explain a substantial fraction of US net external liabilities. We present a simple two-country model with an internationally traded bond, in which capital controls are reflected in the presence of borrowing and lending constraints on that bond. In a US versus the rest of the world (RoW) scenario, we perform experiments that are largely consistent with countries' liberalization experiences. A reduction in the RoW's controls on capital outflows and/or a tightening in the RoW's borrowing constraint enable the US economy to better insure against consumption risk relative to the rest of the world, and therefore decrease its motives for precautionary asset holdings relative to the rest of the world. As a result of these asymmetric shifts in countries' barriers to capital mobility, the US runs a long run external deficit.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Economics.

    Volume (Year): 87 (2012)
    Issue (Month): 1 ()
    Pages: 36-49

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    Handle: RePEc:eee:inecon:v:87:y:2012:i:1:p:36-49

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    Web page: http://www.elsevier.com/locate/inca/505552

    Related research

    Keywords: Capital liberalization; External imbalances; Net foreign asset position; Precautionary savings; Borrowing and lending constraints;

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    Cited by:
    1. Steiner, Andreas, 2014. "Current account balance and dollar standard: Exploring the linkages," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 65-94.

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