Foreign Asset Accumulation Among Emerging Market Economies: A Case for Coordination
CAEPR Working Paper No. 2016-001
45 Pages Posted: 2 Mar 2016 Last revised: 26 Jan 2020
Date Written: April 1, 2019
We develop a two-sector, core-periphery country general equilibrium framework with endogenous financial crises to study foreign asset accumulation coordination among emerging market economies. Consistent with the policy prescription described by Bianchi(2011), we show that a national planner in each peripheral country prefers a higher asset position than the decentralized agents but may reduce welfare. A coordinator for all peripheral countries, who considers the general equilibrium effect of aggregate peripheral savings on the world interest rate, prefers a different asset position than the national planner. When we calibrate our model to a group of emerging Asian economies, the quantitative analysis shows that in the absence of coordination, national regulation leads to a 3.7% higher average net foreign asset position and a welfare loss relative to the laissez-faire. In contrast, the coordinated level of net foreign assets is 59% of the uncoordinated level and results in a sizable welfare gain.
Keywords: Foreign Asset Accumulation, World Interest Rate, Policy Coordination, Credit Constraints, Financial Crises
JEL Classification: D62, E43, F32, F42, G01
Suggested Citation: Suggested Citation