A Growth Model of Global Imbalances

Recent empirical evidence shows that gross official capital transactions flow upstream in the international financial markets due to government policy objectives and that they account for the current account surpluses observed in the last decade in the fast-growing emerging economies. Following the Asian financial crisis, the governments of these countries have used national wealth to create a financial buffer to stave off or to confront new balance-of-payments crises by accumulating foreign reserves. We argue that government intervention in the capital market has led to forced saving in these countries generating large global imbalances. This paper builds a two-country neoclassical growth model, which takes public saving into account. Calibrated on IMF data and forecasts between 1981 and 2016, the model rightly predicts the reversal and the size of current account balances observed between the advanced economies and other countries from 1998 onwards. Contrary to the recent theoretical literature on global imbalances, our results support the explanatory and predictive power of the neoclassical growth model when it focuses on national saving and not only on private saving