TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Farhi,Emmanuel
AU  - Gourinchas,Pierre-Olivier
TI  - An Equilibrium Model of "Global Imbalances" and Low Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11996
PY  - 2006
Y2  - February 2006
UR  - http://www.nber.org/papers/w11996
L1  - http://www.nber.org/papers/w11996.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Emmanuel Farhi
Harvard University
Department of Economics
Littauer Center
Cambridge, MA 02138
Tel: 617/496-1835
Fax: 617/495-8570
E-Mail: efarhi@harvard.edu

Pierre-Olivier Gourinchas
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-0720
Fax: 510/642-6615
E-Mail: pog@econ.berkeley.edu
AB  - 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.
ER  -