The Two Crises of International Economics

Michael P. Dooley, Peter M. Garber, David Folkerts-Landau

NBER Working Paper No. 13197
Issued in June 2007
NBER Program(s):   IFM

In this essay, we argue that key assumptions in international macroeconomic theory, though useful for understanding the economic relationships among developed countries, have been pushed beyond their competence to include relationships between developed economies and emerging markets. The Achilles heel of this extended development model is the assumption that threats to deprive the debtor countries of gains from trade provide incentives for poor countries to repay more than trivial amounts of international debt. Replacing this assumption with the idea that collateral is required to support gross international capital flows suggests that the pattern of current account balances seen in recent years is a sustainable equilibrium.

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Acknowledgments

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