NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Ricardo J. Caballero, Emmanuel Farhi, Pierre-Olivier Gourinchas

NBER Working Paper No. 11996
Issued in February 2006
NBER Program(s):   EFG   IFM

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.

download in pdf format
   (1025 K)

email paper

This paper is available as PDF (1025 K) or via email.

This paper was revised on May 24, 2006

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11996

Published: Caballero, Ricardo, Emmanuel Farhi and Pierre-Olivier Gourinchas. “An Equilibrium Model of Global Imbalances and Low Interest Rates." American Economic Review 98, 1 (March 2008). citation courtesy of

Users who downloaded this paper also downloaded these:
Obstfeld and Rogoff The Unsustainable U.S. Current Account Position Revisited
Mendoza, Quadrini, and Ríos-Rull w12909 Financial Integration, Financial Deepness and Global Imbalances
Caballero, Farhi, and Gourinchas w14521 Financial Crash, Commodity Prices and Global Imbalances
Feldstein w13952 Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate
Caballero and Krishnamurthy w14688 Global Imbalances and Financial Fragility
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us