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

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

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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Bibliographic Info

Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt7xc0g8mm.

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Date of creation: 25 Jun 2006
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Handle: RePEc:cdl:ciders:qt7xc0g8mm

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

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References

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  1. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 11-66 National Bureau of Economic Research, Inc.
  2. 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.
  3. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, vol. 96(4), pages 1159-1192, September.
  4. Blanchard, Olivier & Giavazzi, Francesco & Sa, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
  5. Ju, Jiandong & Wei, Shang-Jin, 2006. "A Solution to Two Paradoxes of International Capital Flows," CEPR Discussion Papers 5981, C.E.P.R. Discussion Papers.
  6. 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.
  7. Gilbert,Christopher L. & Vines,David (ed.), 2006. "The World Bank," Cambridge Books, Cambridge University Press, number 9780521029018, April.
  8. Kenneth Rogoff & William Brainard & George Perry, . "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
  9. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government.
  10. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May.
  11. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  12. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," The Institute for International Integration Studies Discussion Paper Series iiisdp079, IIIS.
  13. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  14. Chinn, Menzie David & Frankel, Jeffrey A., 2006. "Will the Euro Eventually Surpass the Dollar As Leading International Reserve Currency?," Santa Cruz Department of Economics, Working Paper Series qt4hz4n9pb, Department of Economics, UC Santa Cruz.
  15. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," NBER Working Papers 11996, National Bureau of Economic Research, Inc.
  16. repec:tcd:wpaper:tep16 is not listed on IDEAS
  17. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.
  18. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
  19. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993.
  20. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, July.
  21. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  22. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
  23. 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.
  24. 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.
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Citations

Blog mentions

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