Friday, 18 March 2011: 09:20
Global imbalances are considered as one of the main culprits of the financial crisis which started in the United States in 2007. This paper aims to build a two-country deterministic growth framework with overlapping generations to investigate the macroeconomic effects of global imbalances that originate from forced saving in one country. This framework allows us to study the existence of a dynamic equilibrium with global imbalances, the impact on the world interest rate, and the short-run and long-run welfare implications on the young and old generations in both countries. In particular, we show that global imbalances worsen the welfare of the young generations of both countries in the short run and can offset the potential gain of the international integration of capital markets.