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Eastern Caution, Western Exuberance and Global Imbalances

  • Miller Marcus

    (University of Warwick)

  • Santos Monteiro Paulo

    (University of Warwick)

  • Zhang Lei

    (University of Warwick)

Why, at the end of the 20th century, should capital markets have served to transfer resources from emerging markets to those which are more developed? Mr. Bernankes interpretationthat the global imbalances reflected a Savings Glut in the East fueled by fear of financial crisishas been challenged for neglecting dis-saving in the West. As we show, these contrasting perspectives can be combined in a stochastic two period, two bloc model: one bloc, the East, has a precautionary saving incentive due to future income uncertainty, while the other, the West, experiences a bubble and, because it smoothes consumption, runs a current account deficit. The tractable global model we use, which relaxes the conventional assumptions of a representative agent and unbiased expectations, shows how a significant resource transfer can be effected with relatively small changes in global interest rates.

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Article provided by De Gruyter in its journal Journal of Globalization and Development.

Volume (Year): 2 (2011)
Issue (Month): 1 (August)
Pages: 1-42

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Handle: RePEc:bpj:globdv:v:2:y:2011:i:1:n:1
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