The EZ Way to Global Imbalances Open Access

Abstract

I report that unanticipated and anticipated shocks to the productivity growth

process in the United States (US) relative to that in the Rest of Developed Market

(RDM) economies have economically and statistically significant effects on

capital flows from and towards Emerging Markets (EM), introducing what I call

indirect trade effects. Extending the Colacito, Croce, Ho and Howard (2018)

two country model to a three country framework generates global capital flows

dynamics that are consistent with the empirical findings.

Table of Contents

1 The EZ Way to Global Imbalances 1

1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Three Countries with Recursive Preferences and Risk-sharing Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.2.1 Recursive Risk-Sharing of News in a Three-Country World: Intuition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.3 Empirical Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1.3.1 Identification of Productivity Growth Shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

1.3.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1.3.3 EM Trade-Balance Regressions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1.3.4 Empirical Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

1.4 Infinite-Horizon Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

1.4.1 Preferences and Consumption Bundles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

1.4.2 Productivity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

1.4.3 Aggregate Resource Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

1.4.4. Optimality Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

1.4.5 Net-Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

1.4.6 Calibration and Solution Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

1.5 Infinite-Horizon Model Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

1.5.1 Model Performance and simulation results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

1.5.2 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

1.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

1.A Additional GMM Estimation Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

About this Dissertation

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School	Laney Graduate School
Department	Economics
Degree	Ph.D.
Submission	Dissertation
Language	English
Research Field	Economics, General Economics, Finance Economics, Theory
Keyword	International capital flows Emerging markets Short- and long-run productivity growth news shocks Developed markets Direct and indirect trade effects
Committee Chair / Thesis Advisor	Yue, Vivian, Emory University Rubio-Ramirez, Juan, Emory University
Committee Members	Chen, Kaiji, Emory University Mandelman, Federico, Federal Reserve Bank of Atlanta

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