Foreign Asset Accumulation Among Emerging Market Economies: A Case for Coordination

Abstract

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 in Bianchi (2011), we show that a national planner in each peripheral country prefers a higher asset position than the decentralized agents, but may not always improve welfare. A coordinator for all peripheral countries, who considers the effect of aggregate peripheral savings on the world interest rate, prefers a different asset position than the national planner. Our quantitative analysis shows that in the absence of coordination, the welfare gain from national regulation is negligible. In contrast, the coordinated level of net foreign assets is 53% of the uncoordinated level, and results in a sizable welfare gain.