Current Account Imbalances and Economic Growth: a two-country model with real-financial linkages

This paper builds a two-country stock-flow consistent model by com- bining a debt-led economy that emits the international reserve currency with an export-led economy. The model has two major implications. First, an initial trade deficit in the debt-led country leads to a perma- nent imbalance in th...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Author Barbosa de Carvalho, Laura
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2012
Subjects
Economic growth
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Summary:This paper builds a two-country stock-flow consistent model by com- bining a debt-led economy that emits the international reserve currency with an export-led economy. The model has two major implications. First, an initial trade deficit in the debt-led country leads to a perma- nent imbalance in the current account, even when the exchange rate is at parity. Second, different re-balancing mechanisms, namely a currency depreciation or the reduction of the propensity to import in the debt-led country, and the increase in the propensity to consume in the export-led country, are shown to reduce both countries' rate of economic growth in the medium-run. The conclusion is that in order to combine higher global economic growth with the long-run stability of the system, deeper changes must take place.