An equilibrium model of "global imbalances" and low interest rates
By: Ricardo J. Caballero, Emmanuel Farhi [and] Pierre-Olivier Gourinchas
Contributors: Farhi, Emmanuel; Gourinchas, Pierre-Olivier; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 06-02; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 06-02.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2006
Place of publication: Cambridge, MA
Language: eng
Number of pages: 53
Description: 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 - ear 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. Keywords: Current account deficits, capital flows, interest rates, global portfolios and equilibrium, growth and financial development asymmetries, exchange rates, FDI, intermediation rents. JEL Classifications: EO, F3, F4, G1.
Notes: "January 14, 2006."

Includes bibliographical references (p. 40-41).

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