Abstract
Why, at the end of the 20th century, should capital markets have served to transfer resources from emerging markets to those which are more developed? Mr. Bernanke’s interpretation—that the global imbalances reflected a Savings Glut in the East fueled by fear of financial crisis—has been challenged for neglecting dis-saving in the West. As we show, these contrasting perspectives can be combined in a stochastic two period, two bloc model: one bloc, the “East,” has a precautionary saving incentive due to future income uncertainty, while the other, the “West,” experiences a bubble and, because it smoothes consumption, runs a current account deficit. The tractable global model we use, which relaxes the conventional assumptions of a representative agent and unbiased expectations, shows how a significant resource transfer can be effected with relatively small changes in global interest rates.
Original language | English |
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Pages (from-to) | 1 |
Number of pages | 40 |
Journal | Journal of Globalization and Development |
Volume | 2 |
Issue number | 1 |
DOIs | |
Publication status | Published - Aug 2011 |
Keywords
- precautionary saving
- asset bubble
- global imbalance
- aggregate and idiosyncratic risk