Foreign Asset Accumulation among Emerging Market Economies: a Case for Coordination

We develop a two-sector, core-periphery country general equilibrium framework with endogenous financial crises to study foreign asset accumulation coordination among emerging market economies. Consistent with the policy prescription described by Bianchi (2011), we show that a national planner in each peripheral country prefers a higher asset position than the decentralized agents but may reduce welfare. A coordinator for all peripheral countries, who considers the general equilibrium effect of aggregate peripheral savings on the world interest rate, prefers a different asset position than the national planner. When we calibrate our model to a group of emerging Asian economies, the quantitative analysis shows that in the absence of coordination, national regulation leads to a 3.7% higher average net foreign asset position and a welfare loss relative to the laissez-faire. In contrast, the coordinated level of net foreign assets is 59% of the uncoordinated level and results in a sizable welfare gain. (Copyright: Elsevier)