We use cookies to ensure that we give you the best experience on our website. By continuing to browse this repository, you give consent for essential cookies to be used. You can read more about our Privacy and Cookie Policy.

Durham Research Online
You are in:

An OLG model of global imbalances.

Eugeni, S. (2015) 'An OLG model of global imbalances.', Journal of international economics., 95 (1). pp. 83-97.


In 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 rate in the US is therefore evidence in favor 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.

Item Type:Article
Keywords:Global imbalances, Capital flows, Trade dynamics, OLG model, Pay-as-you-go-system, Saving rates.
Full text:(AM) Accepted Manuscript
Download PDF
Publisher Web site:
Publisher statement:NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Economics, 95, January 2015, 10.1016/j.jinteco.2014.10.003.
Date accepted:20 October 2014
Date deposited:10 February 2015
Date of first online publication:28 October 2014
Date first made open access:No date available

Save or Share this output

Look up in GoogleScholar