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

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

Three of the most important recent facts in global macroeconomics — the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio — appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions’ capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt7xc0g8mm.

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Date of creation: 25 Jun 2006
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Handle: RePEc:cdl:ciders:qt7xc0g8mm
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  1. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege," CEPR Discussion Papers 5220, C.E.P.R. Discussion Papers.
  2. Eduardo A. Cavallo & Jeffrey Frankel, 2007. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Research Department Publications 4544, Inter-American Development Bank, Research Department.
  3. Chinn, Menzie David & Frankel, Jeffrey A., 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," Center for Global, International and Regional Studies, Working Paper Series qt6p4215w1, Center for Global, International and Regional Studies, UC Santa Cruz.
  4. Caballero, Ricardo J. & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Scholarly Articles 3229094, Harvard University Department of Economics.
  5. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  6. Shang-Jin Wei & Jiandong Ju, 2006. "A Solution to Two Paradoxes of International Capital Flows," IMF Working Papers 06/178, International Monetary Fund.
  7. 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.
  8. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  9. Martin Feldstein, 2005. "Monetary Policy in a Changing International Environment: The Role of Global Capital Flows," NBER Working Papers 11856, National Bureau of Economic Research, Inc.
  10. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, June.
  11. Kenneth Rogoff & William Brainard & George Perry, . "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
  12. Gian Milesi-Ferretti & Philip R. Lane, 2005. "A Global Perspectiveon External Positions," IMF Working Papers 05/161, International Monetary Fund.
  13. Ricardo Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2004. "Speculative Growth: Hints from the US Economy," NBER Working Papers 10518, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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.
  16. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  17. 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.
  18. Christian Broda & David E. Weinstein, 2004. "Globalization and the Gains from Variety," NBER Working Papers 10314, National Bureau of Economic Research, Inc.
  19. Blanchard, Olivier & Giavazzi, Francesco & Sá, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
  20. 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.).
  21. William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993.
  22. 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.
  23. 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.
  24. repec:tcd:wpaper:tep16 is not listed on IDEAS
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