Working Paper: CEPR ID: DP10012
Authors: Philippe Bacchetta; Kenza Benhima
Abstract: In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, based on Bacchetta and Benhima (2014), with a Developed and an Emerging country. Firms need to save in liquid assets to finance their production projects, especially in the Emerging country. In this context, we examine the impact of a credit crunch in the Developed country and of a growth slowdown in both countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the Emerging market implies a trade balance improvement in the Developed country.
Keywords: capital flows; credit constraints; financial crisis; global imbalances
JEL Codes: E22; F21; F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate saving in emerging markets (O16) | Global imbalances (F65) |
| Credit crunch in the developed country (F65) | Smaller global imbalances (F65) |
| Growth slowdown in the developed country (O57) | Smaller global imbalances (F65) |
| Growth slowdown in the emerging country (O11) | Smaller global imbalances (F65) |
| Slowdown in the emerging market (F66) | Trade balance of the developed country (F14) |