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

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

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. 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11996.

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Date of creation: Feb 2006
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Handle: RePEc:nbr:nberwo:11996

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  1. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338 National Bureau of Economic Research, Inc.
  3. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," NBER Working Papers 11563, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers 2000516, Trinity College Dublin, Department of Economics.
  7. Jeffrey A. Frankel & Eduardo A. Cavallo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality," NBER Working Papers 10957, National Bureau of Economic Research, Inc.
  8. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  9. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  10. 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.).
  11. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  12. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
  13. 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.
  14. 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.
  15. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
  16. repec:tcd:wpaper:tep16 is not listed on IDEAS
  17. Gilbert,Christopher L. & Vines,David (ed.), 2006. "The World Bank," Cambridge Books, Cambridge University Press, number 9780521029018, November.
  18. 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.
  19. Kenneth Rogoff & William Brainard & George Perry, . "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
  20. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  21. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993.
  22. 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.
  23. 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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Blog mentions

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