The origins of global imbalances
In this paper we study the endogenous response of unequally developed regions to a drop in investment and trade costs in a general equilibrium model. The response is characterized by a rise in foreign direct investment in the underdeveloped region and increased consumption in the developed one, leading to trade imbalances between the regions. We hereby propose that declining investment and trade costs could have caused this century’s global imbalances.
JEL Codes: F12, F21, F34, F36.
Keywords: Economic development, foreign direct investment, global imbalances, multi-country general-equilibrium model.
Issued: December 2008
Download: CNB WP No. 7/2008 (pdf, 351 kB)