Financial Integration, House Price Dynamics, and Saving Rate Divergence in an OLG Model with Intra-EMU and Asian–US Trade Imbalances

A dramatic decline of European Monetary Union (EMU) periphery’s and the US saving rate, house price booms and huge global and intra-EMU trade imbalances characterize the evolution of the world economy since Euro-related intra-EMU and global financial integration after the East-Asian currency crisis up to the onset of the global financial crisis 2007/2008. While the intra-EMU and global trade imbalances and the huge level differences between Asian and US saving rates can be explained by means of Farmer and Mihaiescu’s (Credit constraints and differential growth in equilibrium modeling of EMU and global trade imbalances, 2016) three-country, three-good OLG model with financial constraints and growth rate differentials, the pronounced decline in EMU periphery’s and in the US saving rate cannot. It is natural to suggest that house price booms in EMU periphery and in the USA. boosted consumption and reduced savings. Thus, this chapter introduces house price dynamics à la Arce and López-Salido (American Economic Journal: Macroeconomics, 3:212–241, 2011) and Basco (Journal of International Economics, 92:78–94) into Farmer and Ban’s (Progress in economic research, Nova Science, New York, 2015) inter-temporal equilibrium model, and finds that house price increases let EMU periphery’s and US saving rates indeed decline more quickly—in line with empirical facts.