Since the late 1990s, the United States has received large capital flows from developing countries - a phenomenon known as the global saving glut - and experienced a productivity growth slowdown. Motivated by these facts, Fornaro, Wolf, and Benigno provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods, inducing a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. This effect, which Fornaro, Wolf, and Benigno dub the global financial resource curse, can help explain why the global saving glut has been accompanied by subdued investment and growth, in spite of low global interest rates.
Risk aversion and foreign investors' changing appetite for risk-taking have shown to be key determinants of the global financial cycle. To match these facts, Akinci, Kalemli-Özcan, and Queralto propose a two-country macroeconomic framework featuring time-varying uncertainty and cross-border holdings of risky assets by financial intermediaries to understand the source and effects of global risk-on and risk-off effects.They first consider an economy in financial autarky, and find that the presense of balance-sheet constrained intermediaries implies that higher uncertainty leads to sharp declines in asset prices and increases in risk premia. Akinci, Kalemli-Özcan, and Queralto next show how the economy transitions from autarky to financial openness: U.S. financial intermediaries acquire foreign assets to benefit from portfolio diversification, effectively leads to deleveraging pressure on intermediaries in both in both countries as well as to increases in global risk premia and decreases in global asset values, consistent with the empirical evidence. Finally, Akinci, Kalemli-Özcan, and Queralto show that financial constraints of these intermediaries are important to generate effects of uncertainty shocks of exchange rates, UIP premia, and capital flows that are consistent with the empirical evidence.
Observed patterns of international investment are difficult to reconcile with frictionless capital markets. In this paper, Pellegrino, Spolaore, and Wacziarg provide a novel multi-country dynamic general equilibrium model with rationally-inattentive investors, where cross-border investment is subject to both information and policy frictions. The presence of these frictions results in persistent (steady-state) misallocation of capital across countries. Pellegrino, Spolaore, and Wacziarg estimate model parameters using nationality-based, bilateral investment data, and find a major role for information barriers, which the researchers capture using measures of geographic, linguistic and cultural distance. Their unifying theoretical–empirical framework can account for several stylized facts: the gravity structure of investment flows, home bias, persistent global imbalances and capital return differentials across countries, as well as the paucity of net flows from rich to poor economies. Pellegrino, Spolaore, and Wacziarg then perform counterfactual analysis: they find that information and policy barriers to international investment greatly amplify the capital gap between rich and poor countries, and result in a large reduction in world output.
This paper was distributed as Working Paper 28694, where an updated version may be available.
Ottonello, Perez, and Varraso study the design of macroprudential policies based on quantitative collateralconstraint models. The researchers show that the desirability of macroprudential policies critically depends on the specific form of collateral used in debt contracts: While inefficiencies arise when current prices affect collateral--a frequent benchmark used to guide policies--they do not when only future prices affect collateral. Since the microfoundations and quantitative predictions of models with future-price collateral constraints do not appear less plausible than those using current prices, Ottonello, Perez, and Varraso conclude that additional empirical work is essential for the use of these models in macroprudential policy design.
This paper was distributed as Working Paper 29204, where an updated version may be available.
This paper studies the factors accounting for the large, coincident increases in international borrowing and lending and international trade from 1970 to the present. Alessandria, Bai, and Woo focus on the rise in annual changes in borrowing and lending across countries as summarized by the rise in the dispersion of the trade balance as a share of GDP. The researchers show that these two salient features - a rise in net and gross international trade - are largely a consequence of a reduction in intratemporal trade barriers rather than a substantial reduction in the frictions on intertemporal trade or greater asymmetries in business cycles. Beyond explaining changes in the distribution of gross and net trade, the fall in frictions on intratemporal trade are consistent with the reduction in dispersion in other key macro time series such as the real exchange rate, terms of trade, and export-import ratio.