An Equilibrium Model of Global Imbalances and Low Interest Rates

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

No 894, 2006 Meeting Papers from Society for Economic Dynamics

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) 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. (search for similar items in EconPapers)
JEL-codes: E0 F3 F4 G1 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (79)

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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)
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