Unstable Prosperity: How Globalization Made the World Economy More Volatile

Enrique Mendoza and Vincenzo Quadrini

No 18324, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The sharp, secular decline in the world real interest rate of the past thirty years suggests that the surge in global demand for financial assets outpaced the growth in their supply. We argue that this phenomenon was driven by: (i) faster growth in emerging markets, (ii) changes in the financial structure of both emerging and advanced economies, and (iii) changes in demand and supply of public debt issued by advanced economies. We then show that the low-interest-rate environment made the world economy more vulnerable to financial crises. These findings are the quantitative predictions of a two-region model in which privately-issued financial assets (i.e., inside money) provide productive services but can be defaulted on.

Keywords: Development (search for similar items in EconPapers)
JEL-codes: F34 F62 G01 (search for similar items in EconPapers)
Date: 2023-07
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