Working Paper: NBER ID: w11996
Authors: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
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) heterogeneity 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.
Keywords: global imbalances; low interest rates; current account deficit; financial assets; capital flows
JEL Codes: E0; F3; F4; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| persistent current account deficit in the U.S. (F32) | higher demand for U.S. assets (E41) |
| growth differentials and financial market conditions in other regions (F29) | higher demand for U.S. assets (E41) |
| slowing growth in Europe and the Rest of the World (O52) | capital flows towards the U.S. increase (F32) |
| capital flows towards the U.S. increase (F32) | decline in real interest rates (E43) |
| collapse of financial markets in Rest of the World (F65) | permanent decline in interest rates in the U.S. (E43) |
| appreciation of U.S. assets (F31) | persistent increase in their share in global portfolios (G15) |
| higher demand for U.S. assets (E41) | persistent current account deficit in the U.S. (F32) |