Fear and market failure: Global imbalances and self-insurance”

Arbeitspapier

This paper proposes an integrated framework to analyze jointly two key issues: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss Aversion in emerging markets, their precautionary savings can generate substantial 'global imbalances', especially if there is an inefficient supply of global 'insurance'. In principle, lower real interest rates will ensure that aggregate demand equals supply at a global level (though the required real interest may be negative). While a precautionary savings glut appears to be a temporary phenomenon, a process of correction triggered by a 'Sudden Stop' in capital flows to the United States might lead to a 'hard landing'.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 593

Classification and Topics

• Classification: Wirtschaft ; Exchange and Production Economies ; Incomplete Markets ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; General Aggregative Models: Neoclassical ; Macroeconomics: Consumption; Saving; Wealth ; Financial Markets and the Macroeconomy ; Current Account Adjustment; Short-term Capital Movements
• Subject: stochastic dynamic general equilibrium ; loss aversion ; liquidity trap

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Miller, Marcus ; Zhang, Lei
• Event: Veröffentlichung
• (who): Inter-American Development Bank, Research Department
• (where): Washington, DC
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/51445
• Last update: 10.03.2025, 11:42 AM CET