The seminar will be held in the Visitor Centre at 1:30 pm.
Abstract
Differences in financial systems are often named as prime candidates for being responsible for the current state of world global imbalances. This paper argues that the process of capital liberalization and, in particular, the catching up relative to the US of other advanced and emerging market economies in terms of financial account openness can explain a substantial fraction of the current US external deficit. We assess this link in a simple two country one good model with an internationally traded bond. Capital controls are reflected in the presence of borrowing and lending constraints on that bond.
A reduction in the foreign country's (RoW) constraint on capital outflows enables the domestic economy (US) to better insure against consumption risk and therefore decreases its motives for precautionary asset holdings relative to the rest of the world. As a result, the US runs a long run external deffcit.
Keywords: Capital Liberalization, External Imbalances, Precautionary Savings, Net Foreign Asset Position
JEL-Codes: F32, F34, F41