Current Account Imbalances and Economic Growth: a two-country model with real-financial linkages

Laura Barbosa de Carvalho

No 1203, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper builds a two-country stock-flow consistent model by com- bining a debt-led economy that emits the international reserve currency with an export-led economy. The model has two major implications. First, an initial trade deficit in the debt-led country leads to a perma- nent imbalance in the current account, even when the exchange rate is at parity. Second, different re-balancing mechanisms, namely a currency depreciation or the reduction of the propensity to import in the debt-led country, and the increase in the propensity to consume in the export-led country, are shown to reduce both countries’ rate of economic growth in the medium-run. The conclusion is that in order to combine higher global economic growth with the long-run stability of the system, deeper changes must take place.

Keywords: Stock-flow consistency; two-country model; debt-led consumption; global imbalances; international reserves (search for similar items in EconPapers)
JEL-codes: E12 E17 F32 F43 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.economicpolicyresearch.org/econ/2012/NSSR_WP_032012.pdf First version, 2012 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:1203

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