The Saving Glut Explanation of Global Imbalances: the Role of Underinvestment
Flavia Corneli ()
No ECO2009/41, Economics Working Papers from European University Institute
According to the “Saving Glut hypothesis”, global imbalances are caused by inefficiently high level of precautionary savings in financially underdeveloped regions, where agents have limited opportunity to diversify idiosyncratic risk. This paper generalizes the approach by modeling idiosyncratic risk in entrepreneurial activities, which can be only partially hedged. As a result, agents save too much and invest too little, relative to the efficient allocation, depressing production activities and the real interest rate. Capital account liberalization towards financially more advanced economies then produces an outflow of capital in search of safer investment, with the effect of further reducing domestic investment in countries with poor financial institutions. The model predicts welfare losses for less financially developed economies, and an increase in wealth inequality for advanced economies. Finally, the present analysis is able to explain the direct link between the financial crisis and global recession and the long run implications of worsening financial conditions on countries’ net external positions.
Keywords: Current Account; Financial Markets; Heterogeneity; Incomplete Markets; International Capital Movements (search for similar items in EconPapers)
JEL-codes: D52 E44 F32 G11 G15 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed
Downloads: (external link)
http://cadmus.eui.eu/dspace/bitstream/1814/12893/3/ECO_2009_41.pdf main text
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://cadmus.eui.eu/dspace/bitstream/1814/12893/3/ECO_2009_41.pdf [301 Moved Permanently]--> https://cadmus.eui.eu/dspace/bitstream/1814/12893/3/ECO_2009_41.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2009/41
Access Statistics for this paper
More papers in Economics Working Papers from European University Institute Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Julia Valerio ().