Abstract:
Three of the most important recent facts in global macroeconomics the sustained rise in the US
current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets
in global portfolio appear as anomalies from the perspective of conventional wisdom and models.
Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two
observed forces: a) potential growth differentials among different regions of the world and, b) hetero-
geneity in these regions' capacity to generate financial assets from real investments. In extensions of the
basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with
the recent trends in these variables. More generally, the framework is flexible enough to shed light on a
range of scenarios in a global equilibrium environment.
(This paper includes comments by Jeffrey Frankel and Michael Mussa.)
Keywords: Current account deficits, capital flows, interest rates, global portfolios and equilibrium,
growth and financial development asymmetries, exchange rates, FDI, intermediation rents