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Unbalanced Growth and the Sustainability of the Current Account Deficit

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  • Luigi Bonatti

Abstract

In an endogenous growth framework, a two-country economy is modeled with an integrated product and asset markets. The countries differ with respect to the share of their GDP that is redistributed through the fiscal system, and the country where this share is smaller tends to grow faster. This high-growth country finances a portion of its investment expenditures by attracting funds from the low-growth country, whose growth rate is depressed by this outflow. The high-growth country runs ever-increasing current account deficits and its negative net international investment position rises without bounds. This notwithstanding, sustainability is guaranteed. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

Suggested Citation

  • Luigi Bonatti, 2006. "Unbalanced Growth and the Sustainability of the Current Account Deficit," Review of International Economics, Wiley Blackwell, vol. 14(5), pages 773-796, November.
  • Handle: RePEc:bla:reviec:v:14:y:2006:i:5:p:773-796
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    References listed on IDEAS

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    1. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13.
    2. Jack L. Hervey & Loula S. Merkel, 2000. "A record current account deficit: causes and implications," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 2-13.
    3. Lee Branstetter, 1996. "Are Knowledge Spillovers International or Intranational in Scope? Microeconometric Evidence from the Japan and the United States," NBER Working Papers 5800, National Bureau of Economic Research, Inc.
    4. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
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    Cited by:

    1. Gazi M. Hassan & Mark J. Holmes, 2016. "Do Remittances Facilitate a Sustainable Current Account?," The World Economy, Wiley Blackwell, vol. 39(11), pages 1834-1853, November.
    2. Luigi Bonatti & Andrea Fracasso, 2009. "The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting," Department of Economics Working Papers 0905, Department of Economics, University of Trento, Italia.
    3. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2010. "On the Stationarity of Current Account Deficits in the European Union," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 730-740, September.

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