Date: 2009
Type: Working Paper
The Saving Glut Explanation of Global Imbalances. The Role of Underinvestment
Working Paper, EUI ECO, 2009/41
CORNELI, Flavia, The Saving Glut Explanation of Global Imbalances. The Role of Underinvestment, EUI ECO, 2009/41 - https://hdl.handle.net/1814/12893
Retrieved from Cadmus, EUI Research Repository
According to the “Saving Glut hypothesis”, global imbalances are caused by inefficiently high level of precautionary savings in .nancially underdeveloped regions, where agents have limited opportunity to diversify idiosyncratic risk. This paper generalizes the approach by modeling idiosyncratic risk in entrepreneurial activities, which can be only partially hedged. As a result, agents save too much and invest too little, relative to the efficient allocation, depressing production activities and the real interest rate. Capital account liberalization towards financially more advanced economies then produces an outflow of capital in search of safer investment, with the effect of further reducing domestic investment in countries with poor financial institutions. The model predicts welfare losses for less financially developed economies, and an increase in wealth inequality for advanced economies. Finally, the present analysis is able to explain the direct link between the financial crisis and global recession and the long run implications of worsening financial conditions on countries’ net external positions
Cadmus permanent link: https://hdl.handle.net/1814/12893
ISSN: 1725-6704
Series/Number: EUI ECO; 2009/41