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

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

The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. (JEL: E44, F21, F31, F32)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.358
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File URL: http://www.aeaweb.org/aer/data/mar08/20060199_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 358-93

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:358-93
Note: DOI: 10.1257/aer.98.1.358
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  1. 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.
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  4. 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.
  5. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-93, March.
  6. 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.
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  8. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, March.
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  11. 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.
  12. Christian Broda & David E. Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
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  17. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc.
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  19. Kenneth Rogoff & William Brainard & George Perry, . "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
  20. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  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.).
  22. 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.
  23. 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.
  24. Shang-Jin Wei & Jiandong Ju, 2006. "A Solution to Two Paradoxes of International Capital Flows," IMF Working Papers 06/178, International Monetary Fund.
  25. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993, December.
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