Corporate Saving and Global Rebalancing

Abstract

In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, with a developed country and an emerging country. Firms need to save in liquid assets to finance their production projects, especially in the emerging country. In this context, we examine the impact of a credit crunch in the developed country and of a growth slowdown in the two countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the emerging market implies a trade balance improvement in the developed country.