The Two Crises of International Economics
Michael P. Dooley
University of California at Santa Cruz; National Bureau of Economic Research (NBER)
Peter M. Garber
Brown University - Department of Economics; National Bureau of Economic Research (NBER)
Deutsche Bank, London; National Bureau of Economic Research (NBER)
NBER Working Paper No. w13197
In this essay, we argue that key assumptions in international macroeconomic theory, though useful for understanding the economic relationships among developed countries, have been pushed beyond their competence to include relationships between developed economies and emerging markets. The Achilles heel of this extended development model is the assumption that threats to deprive the debtor countries of gains from trade provide incentives for poor countries to repay more than trivial amounts of international debt. Replacing this assumption with the idea that collateral is required to support gross international capital flows suggests that the pattern of current account balances seen in recent years is a sustainable equilibrium.
Number of Pages in PDF File: 30
Date posted: July 3, 2007
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