The Two Crises of International Economics

30 Pages Posted: 3 Jul 2007  

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)

David Folkerts-Landau

Deutsche Bank, London; National Bureau of Economic Research (NBER)

Date Written: June 2007

Abstract

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.

Suggested Citation

Dooley, Michael P. and Garber, Peter M. and Folkerts-Landau, David, The Two Crises of International Economics (June 2007). NBER Working Paper No. w13197. Available at SSRN: https://ssrn.com/abstract=997553

Michael P. Dooley (Contact Author)

National Bureau of Economic Research (NBER)

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University of California at Santa Cruz ( email )

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510-459-3662 (Phone)
510-459-5900 (Fax)

Peter M. Garber

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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Brown University - Department of Economics ( email )

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Providence, RI 02912
United States
401-863-2145 (Phone)

David Folkerts-Landau

Deutsche Bank, London ( email )

Winchester House
Great Winchester Street, 1
London EC2N 2DB
United Kingdom
(44) 171 545-4545 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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