Thursday, 29 March 2012: 8:50 AM
Some emerging countries manipulate their exchange rates to promote an export-led growth policy and manage their current account. This has contributed to creating a "global saving glut" (Bernanke 2005) and increasing global current account imbalances since the end of the 1990s. This paper proposes a calibrated two-country overlapping generations model, in which a country can intervene on the foreign exchange market in order to grow without relying on foreign saving. When time preferences and development levels are different across countries, the effects of foreign exchange intervention on current accounts, income growth and the interest rates are consistent with observed facts. In particular, we show that there can be a tradeoff between current account management and growth.