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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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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. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
  2. Kenneth Rogoff & William Brainard & George Perry, . "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
  3. 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.
  4. 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.
  5. 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.
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  10. 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.
  11. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," CEPREMAP Working Papers (Docweb) 0606, CEPREMAP.
  12. 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.
  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. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
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  16. 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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  18. 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.
  19. Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
  20. 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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