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An OLG model of global imbalances

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  • Sara Eugeni

Abstract

In this paper, we investigate the relationship between East Asian countries' high propensity to save and global imbalances in a two-country OLG model with production. The absence of pay-as-you-go pension systems can rationalize the saving behavior of emerging economies and capital outflows to the United States. The model predicts that the country with no pay-as-you-go system can run a trade surplus only as long as the long-run growth rate of the economy is higher than the real interest rate (capital overaccumulation case). The low real interest rates in the US is evidence in favor of the hypothesis that there is a "global saving glut" in the world economy. The model can also explain why the US current account deteriorated gradually and only in the late 1990s, although the net foreign asset position had already turned negative in the early 1980s. Finally, this analysis implies that the introduction of a pay-as-you-go system in China would have the effect of reducing the imbalances.

Suggested Citation

  • Sara Eugeni, 2013. "An OLG model of global imbalances," Discussion Papers 13/05, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:13/05
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    More about this item

    Keywords

    global imbalances; capital flows; current account dynamics; OLG model; pay-as-you-go-system;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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