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Eastern Caution, Western Exuberance and Global Imbalances

Marcus Miller (), Paulo Santos Monteiro () and Lei Zhang ()

Journal of Globalization and Development, 2011, vol. 2, issue 1, 1-42

Abstract: Why, at the end of the 20th century, should capital markets have served to transfer resources from emerging markets to those which are more developed? Mr. Bernanke's interpretation-that the global imbalances reflected a Savings Glut in the East fueled by fear of financial crisis-has been challenged for neglecting dis-saving in the West. As we show, these contrasting perspectives can be combined in a stochastic two period, two bloc model: one bloc, the "East," has a precautionary saving incentive due to future income uncertainty, while the other, the "West," experiences a bubble and, because it smoothes consumption, runs a current account deficit. The tractable global model we use, which relaxes the conventional assumptions of a representative agent and unbiased expectations, shows how a significant resource transfer can be effected with relatively small changes in global interest rates.

Date: 2011
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