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

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

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. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11996.

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Date of creation: Feb 2006
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Publication status: published as Caballero, Ricardo, Emmanuel Farhi and Pierre-Olivier Gourinchas. “An Equilibrium Model of Global Imbalances and Low Interest Rates." American Economic Review 98, 1 (March 2008).
Handle: RePEc:nbr:nberwo:11996
Note: EFG IFM
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  1. 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.
  2. Christian Broda & David Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
  3. 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.
  4. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
  5. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  6. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers 2000516, Trinity College Dublin, Department of Economics.
  7. 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.
  8. Kenneth Rogoff & William Brainard & George Perry, . "Global Current Account Imbalances and Exchange Rate Adjustments," Working Paper 33687, Harvard University OpenScholar.
  9. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  10. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," NBER Working Papers 11996, National Bureau of Economic Research, Inc.
  11. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338 National Bureau of Economic Research, Inc.
  12. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2, June.
  13. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," NBER Working Papers 11563, National Bureau of Economic Research, Inc.
  14. Chinn, Menzie D. & Ito, Hiro, 2007. "Current account balances, financial development and institutions: Assaying the world "saving glut"," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 546-569, June.
  15. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government.
  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. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers.
  18. Jiandong Ju & Shang-Jin Wei, 2006. "A Solution to Two Paradoxes of International Capital Flows," NBER Working Papers 12668, National Bureau of Economic Research, Inc.
  19. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
  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. Shang-Jin Wei & Jiandong Ju, 2006. "A Solution to Two Paradoxes of International Capital Flow," IMF Working Papers 06/178, International Monetary Fund.
  23. repec:tcd:wpaper:tep16 is not listed on IDEAS
  24. 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.
  25. repec:cup:cbooks:9780521029018 is not listed on IDEAS
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