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Title:Fear and market failure: Global imbalances and self-insurance┬ö PDF Logo
Authors:Miller, Marcus
Zhang, Lei
Issue Date:2007
Series/Report no.:Working paper // Inter-American Development Bank, Research Department 593
Abstract: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'.
Subjects:stochastic dynamic general equilibrium
loss aversion
liquidity trap
JEL:D51
D52
E12
E13
E21
E44
F32
Document Type:Working Paper
Appears in Collections:Research Department Working Papers, Inter-American Development Bank

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