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An Equilibrium Model of 'Global Imbalances' and Low Interest Rates

Author

Listed:
  • Caballero, Ricardo
  • Gourinchas, Pierre-Olivier
  • Farhi, Emmanuel
Abstract
Three of the most important recent facts in global macroeconomics - the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio - appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) hetero- geneity in these regions? capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

Suggested Citation

  • Caballero, Ricardo & Gourinchas, Pierre-Olivier & Farhi, Emmanuel, 2006. "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates," CEPR Discussion Papers 5573, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5573
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Current account deficits; Capital flows; Interest rates; Global portfolios and equilibrium; Growth and financial development asymmetries; Exchange rates; Fdi; Intermediation rents;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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