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

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  • Caballero, Ricardo
  • 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) hetero- geneity 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. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5573.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5573

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

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  1. Ricardo J Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An equilibrum model of "global imbalances" and low interest rates," BIS Working Papers 222, Bank for International Settlements.
  2. 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.
  3. 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.
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  14. Shang-Jin Wei & Jiandong Ju, 2006. "A Solution to Two Paradoxes of International Capital Flow," IMF Working Papers 06/178, International Monetary Fund.
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  16. Gilbert,Christopher L. & Vines,David (ed.), 2006. "The World Bank," Cambridge Books, Cambridge University Press, number 9780521029018.
  17. 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.
  18. 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.
  19. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  20. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  21. 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.).
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  23. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 546-569, June.
  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. The most important Budget number
    by chris dillow in Stumbling and Mumbling on 2009-04-22 16:51:13
  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. Global Imbalances: Links to Economic and Financial Stability
    by Guest Author in the big picture on 2011-02-21 15:09:05
  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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