Global Imbalances and Lending Constraints in a Standard Business Cycle Model

34 Pages Posted: 15 Apr 2007

See all articles by Suparna Chakraborty

Suparna Chakraborty

University of San Francisco

Robert Dekle

University of Southern California - Department of Economics

Date Written: Feburary 16, 2007

Abstract

Does increased international liquidity, the saving glut explain the recent deterioration of US current account balances? In this paper, we develop a simple, two country real business cycle model to answer this question. The salient feature of our model is that lending by one country is constrained by it's wealth by a regulatory or institutional lending constraint. We allow shocks to this lending constraint to capture a country's ability to lend as financial regulations evolve and the country's financial markets to develop. Applying our model to the test case of Japan (lender) and the US, we find that our general equilibrium model captures well, how differential productivity growth affects the flow of capital from the lending country (Japan) to the U.S., and how the lending constraint interacts with productivity growth to impact the borrowing country, or the U.S. current account.

Suggested Citation

Chakraborty, Suparna and Dekle, Robert, Global Imbalances and Lending Constraints in a Standard Business Cycle Model (Feburary 16, 2007). IEPR Working Paper No. 07.1. Available at SSRN: https://ssrn.com/abstract=979381 or http://dx.doi.org/10.2139/ssrn.979381

Suparna Chakraborty (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

HOME PAGE: http://chakrabortys.weebly.com

Robert Dekle

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-8335 (Phone)

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