Working Paper: NBER ID: w22198
Authors: Nicholas Ford; Charles Yuji Horioka
Abstract: This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalisation across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalisation across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high saving-investment correlations, and prevent real interest rates from being equalised across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from PPP (purchasing power parity) for extended periods of time and can therefore also explain the PPP puzzle. Thus, we are able to resolve 2 of Obstfeld and Rogoff’s (2000) “6 major puzzles in macroeconomics” with essentially the same explanation.
Keywords: No keywords provided
JEL Codes: E40; F21; F31; F32; F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| barriers to mobility in global financial and goods markets (F65) | impede net transfers of capital (F38) |
| barriers to mobility in global financial and goods markets (F65) | prevent equalization of real interest rates across countries (F32) |
| frictions in either market (D52) | produce high saving-investment correlations (E20) |
| frictions in either market (D52) | deviations from PPP (F31) |
| barriers to mobility in global financial and goods markets (F65) | prolonged deviations of real exchange rates from PPP (F31) |