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

Ricardo Caballero (), Pierre-Olivier Gourinchas and Emmanuel Farhi

No 5573, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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) hetero- geneity 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 (search for similar items in EconPapers)
JEL-codes: E0 F3 F4 G1 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-dge, nep-fin, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (191)

Downloads: (external link)
https://cepr.org/publications/DP5573 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: An Equilibrium Model of "Global Imbalances" and Low Interest Rates (2008)
Working Paper: An Equilibrium Model of "Global Imbalances" and Low Interest Rates (2008)
Working Paper: An equilibrum model of "global imbalances" and low interest rates (2006)
Working Paper: An Equilibrium Model of "Global Imbalances" and Low Interest Rates (2006)
Working Paper: An Equilibrium Model of "Global Imbalances" and Low Interest Rates (2006)
Working Paper: An Equilibrium Model of "Global Imbalances" and Low Interest Rates (2006)
Working Paper: An Equilibrium Model of Global Imbalances and Low Interest Rates (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5573

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5573

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().