In this essay, we argue that key assumptions in international macroeconomic theory, though useful for understanding the economic relationships among developed countries, have been pushed beyond their competence to include relationships between developed economies and emerging markets. The Achilles heel of this extended development model is the assumption that threats to deprive the debtor countries of gains from trade provide incentives for poor countries to repay more than trivial amounts of international debt. Replacing this assumption with the idea that collateral is required to support gross international capital flows suggests that the pattern of current account balances seen in recent years is a sustainable equilibrium.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13197.
Length: Date of creation: Jun 2007 Date of revision: Handle: RePEc:nbr:nberwo:13197
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Find related papers by JEL classification: F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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