An OLG model of global imbalances

Eugeni, S.

Abstract

In this paper, we investigate the relationship between East Asian countries' high propensity to save and global imbalances in a two-country OLG model with production. The saving behavior of emerging economies and capital outflows to the United States can be attributed to their poor pay-as-you-go systems. The model predicts that emerging countries run a trade surplus only as long as the long-run growth rate of the economy is higher than the real interest rate (capital overaccumulation case). The low real interest rate in the US is therefore evidence in favor of the hypothesis that there is a “global saving glut” in the world economy. The model can explain why the US current account deteriorated gradually and only in the late 1990s, although the net foreign asset position had already turned negative in the early 1980s. Finally, the analysis also implies that an improvement of the pay-as-you-go system in China would have the effect of reducing the imbalances. In accordance with the theory, we find that the higher is the percentage of the working population covered by the pay-as-you-go system the lower are savings and the current account balance in a cross-section of countries.

Citation

Eugeni, S. (2015). An OLG model of global imbalances. Journal of International Economics, 95(1), 83-97. https://doi.org/10.1016/j.jinteco.2014.10.003

• Journal Article Type: Article
• Acceptance Date: Oct 20, 2014
• Online Publication Date: Oct 28, 2014
• Publication Date: Jan 1, 2015
• Deposit Date: Feb 3, 2015
• Publicly Available Date: Feb 10, 2015
• Journal: Journal of International Economics
• Print ISSN: 0022-1996
• Electronic ISSN: 1873-0353
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 95
• Issue: 1
• Pages: 83-97
• DOI: https://doi.org/10.1016/j.jinteco.2014.10.003
• Keywords: Global imbalances, Capital flows, Trade dynamics, OLG model, Pay-as-you-go-system, Saving rates.
• Public URL: https://durham-repository.worktribe.com/output/1415269