An OLG model of global imbalances

Abstract

The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-pro t purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractIn this paper, we investigate the relationship between East Asian countries' high propensity to save and global imbalances in a two-country OLG model with production. The saving behavior of emerging economies and capital outflows to the United States can be attributed to their poor pay-as-you-go systems. The model predicts that emerging countries run a trade surplus only as long as the long-run growth rate of the economy is higher than the real interest rate (capital overaccumulation case). The low real interest rates in the US is therefore evidence in favour of the hypothesis that there is a "global saving glut" in the world economy. The model can explain why the US current account deteriorated gradually and only in the late 1990s, although the net foreign asset position had already turned negative in the early 1980s. Finally, the analysis also implies that an improvement of the pay-as-you-go system in China would have the effect of reducing the imbalances. In accordance with the theory, we find that the higher is the percentage of the working population covered by the pay-as-you-go system the lower are savings and the current account balance in a cross-section of countries.

The Future of Saving

“…Public pension benefits and private saving are substitutes when it comes to providing old-age retirement income: higher pension benefits mean that individuals have to save less to finance consumption in retirement. 13 This result is consistent with both theoretical and empirical findings that countries with PAYG systems tend to have private saving rates that are lower in direct proportion to the generosity of public pension benefits (Eugeni 2015;Samwick 2000;Curtis, Lugauer, and Mark 2017;Rezk, Irace, and Ricca 2009;Bloom and others 2007;Feldstein 1976). There is also an indirect effect.…”

“…The saving rate also determines how fast a country can rebuild buffers at a time of historically high global debt (IMF 2018b). Motives for personal saving and the design of pension systems could also directly influence individual saving behavior, thereby affecting the overall net foreign asset position of a country and the composition of investment portfolios (Staveley-O'Carroll and Staveley-O'Carroll 2017;Eugeni 2015). This has implications for the dynamics of international capital flows, external imbalances, and global interest rates.…”

“…Staveley-O'Carrol and Staveley-O'Carrol (2017) develop an OLG model in which pension characteristics affect private saving. Eugeni (2015) examines the impact of differences in retirement systems across countries using a two-period OLG model. However, these studies do not cover demographics.…”

Patterns of international capital flows and their implications for developing countries

“…(Bernanke 2005. ) There is a vast theoretical literature that considers differences in financial development as the main driver of global current account imbalances (see, e.g., Angeletos andPanousi (2011), Benhima (2013b), von Hagen and Zhang (2014) as well as Eugeni (2015) which are closely related to Caballero et al (2008) and/or to Mendoza et al (2009), Ju andWei (2010) as well as Wang et al (2017) which model two-way capital flows, and Coeurdacier et al (2015) which provides microfoundations for the emergence of a global saving glut.) 18 To summarize, these theoretical papers suggest that capital market imperfections and heterogeneity in financial development are central to explaining stylized facts 1, 2 and 6.…”

Global imbalances in the XIX, XX and the XXI centuries

“…A situation where n + g is greater than r reflects capital overaccumulation, which is compatible with utility maximization only as long as the demographic structure consists of overlapping-generations 4 . Therefore, the presence of a "global saving glut" (Bernanke, 2005) might explain the positive relationship between the trade balance and the current account in the second globalization, while the first globalization was instead "normal" in the sense of Pareto efficiency (Gale, 1974).…”