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An equilibrum model of "global imbalances" and low interest rates

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Author Info
Ricardo J Caballero
Emmanuel Farhi
Pierre-Olivier Gourinchas

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Abstract

Three of the most important recent facts in global macroeconomics - the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio - appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

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Publisher Info
Paper provided by Bank for International Settlements in its series BIS Working Papers with number 222.

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Length: 88 pages
Date of creation: Dec 2006
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Handle: RePEc:bis:biswps:222

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Related research
Keywords: exchange rates capital flows Current account deficits interest rates global portfolios and equilibrium growth and financial development asymmetries FDI intermediation rents

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Find related papers by JEL classification:
E0 - Macroeconomics and Monetary Economics - - General
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
G1 - Financial Economics - - General Financial Markets

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  1. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," Econometric Society 2004 North American Summer Meetings 508, Econometric Society. [Downloadable!]
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  2. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," The Institute for International Integration Studies Discussion Paper Series iiisdp079, IIIS. [Downloadable!]
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  3. Jiandong Ju & Shang-Jin Wei, 2006. "A Solution to Two Paradoxes of International Capital Flows," NBER Working Papers 12668, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Martin Feldstein, 2005. "Monetary Policy in a Changing International Environment: The Role of Global Capital Flows," NBER Working Papers 11856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Menzie Chinn & Jeffrey Frankel, 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Working Papers 11510, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2005-1), pages 67-146. [Downloadable!]
  7. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January. [Downloadable!] (restricted)
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  8. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
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  11. repec:tcd:wpaper:tep16 is not listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Hauner & Manmohan S. Kumar, 2006. "Fiscal Policy and Interest Rates--How Sustainable Is the "New Economy"?," IMF Working Papers 06/112, International Monetary Fund. [Downloadable!]
  2. Michele Cavallo & Cédric Tille, 2006. "Could capital gains smooth a current account rebalancing?," Working Paper Series 2006-03, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  3. Ziesemer, Thomas, 2007. "Estimations of US debt dynamics: Growth cum debt and the savings glut in Kouri’s model," UNU-MERIT Working Paper Series 003, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
  4. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2007. "The Demand for Treasury Debt," NBER Working Papers 12881, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Charles Engel & John H. Rogers, 2006. "The U.S. Current Account Deficit and the Expected Share of World Output," NBER Working Papers 11921, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Marcel Fratzscher & Luciana Juvenal & Lucio Sarno, 2007. "Asset prices, exchange rates and the current account," Working Paper Series 790, European Central Bank. [Downloadable!]
  7. Michael Devereux & Amartya Lahiri, 2006. "Global current account adjustment: a decomposition," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  8. Ellen R. McGrattan & Edward C. Prescott, 2007. "Technology capital and the U.S. current account," Working Papers 646, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  9. Ju, Jiandong & Wei, Shang-Jin, 2007. "Domestic Institutions and the Bypass Effect of Financial Globalization," CEPR Discussion Papers 6343, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Ravi Balakrishnan & Volodymyr Tulin & Tamim Bayoumi, 2007. "Globalization, Gluts, Innovation or Irrationality: What Explains the Easy Financing of the U.S. Current Account Deficit?," IMF Working Papers 07/160, International Monetary Fund. [Downloadable!]
  12. Pol Antràs & Ricardo J. Caballero, 2007. "Trade and Capital Flows: A Financial Frictions Perspective," NBER Working Papers 13241, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Dimitri B. Papadimitriou & Gennaro Zezza & Greg Hannsgen, 2006. "Can Global Imbalances Continue?: Policies for the U.S. Economy," Economics Strategic Analysis Archive sa_nov_06, Levy Economics Institute, The. [Downloadable!]
  14. Benjamin Eden, 2006. "International Seigniorage Payments," Working Papers 0622, Department of Economics, Vanderbilt University. [Downloadable!]
  15. Ravi Balakrishnan & Volodymyr Tulin, 2006. "U.S. Dollar Risk Premiums and Capital Flows," IMF Working Papers 06/160, International Monetary Fund. [Downloadable!]
  16. Rudolfs Bems & Luca Dedola & Frank Smets, 2007. "US imbalances: the role of technology and policy," Working Paper Series 719, European Central Bank. [Downloadable!]
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  17. Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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