The EZ Way to Global Imbalances Open Access
Ballesteros Ruiz, Carlos Andres (Summer 2022)
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
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