Unstable Prosperity:How Globalization Made the World Economy More Volatile

Enrique Mendoza () and Vincenzo Quadrini
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Enrique Mendoza: University of Pennsylvania and NBER
Vincenzo Quadrini: University of Southern California and CEPR and NBER

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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 part of the increase in global demand was caused by the faster growth of emerging markets economies and changes in their financial structure. We show that the low interest rate made the world economy more vulnerable to financial crises, and the faster growth of emerging economies contributed to that. 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. The model predicts large increases in output volatility worldwide, with roughly a third of the increase due to the faster EMEs growth.

Pages: 53 pages
New Economics Papers: this item is included in nep-ban, nep-des, nep-mac and nep-opm
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