Eden, Maya2013-09-042013-09-042013-05https://hdl.handle.net/10986/15568This paper presents a model of global liquidity shortages. Liquid claims are enforceable promises that play a transaction role. Since developed economies have a comparative advantage in creating liquidity, they export liquid claims to emerging economies, resulting in a permanent current account deficit. This model suggests that unrestricted liquidity flows are (a) welfare reducing for emerging economies and (b) Pareto inefficient. The inefficiency results both from excessive investment for the purpose of creating collateral-backed liquid claims, and from excessive global fragility with respect to collateral shocks.en-USCC BY 3.0 IGOAGGREGATE DEMANDAGGREGATE INCOMEAMOUNT OF COLLATERALASSETSBENCHMARKBIDSBILLBILLSBINDING CONSTRAINTBINDING CONSTRAINTSBROAD MONEYBUDGET CONSTRAINTBUDGET CONSTRAINTSBUSINESS CYCLESCAPITAL ACCUMULATIONCAPITAL CONTROLSCAPITAL MARKETCAPITAL MARKET INTEGRATIONCAPITAL SHARECAPITAL STOCKCAPITAL STOCKSCDCENTRAL BANKCLAIMCLOSED ECONOMYCOLLATERALCOMPARATIVE ADVANTAGECONSUMPTION GROWTHCONSUMPTION PATHCONSUMPTION PATHSCONSUMPTION SMOOTHINGCOORDINATION FAILURECORPORATE BONDSCREDIT BOOMSCURRENCYCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT BALANCESCURRENT ACCOUNT DEFICITCURRENT ACCOUNT IMBALANCESCURRENT ACCOUNT SURPLUSDEBTDECLINE IN INVESTMENTDEPRECIATIONDEPRECIATION RATEDEVELOPMENT POLICYDIVIDENDDIVIDEND INCOMEDOMESTIC FINANCIAL SYSTEMDOMESTIC LIQUIDITYDOMESTIC PRICESDOWNWARD PRESSUREECONOMIC EFFICIENCYECONOMIC GROWTHECONOMIC POLICYELASTICITYELASTICITY OF SUBSTITUTIONEMERGING ECONOMIESEMERGING ECONOMYEMERGING MARKETEMERGING MARKETSENFORCEABILITYENFORCEMENT POWEREQUATIONSEQUILIBRIAEQUILIBRIUMEQUILIBRIUM CONDITIONEQUILIBRIUM CONDITIONSEQUILIBRIUM LEVELSEQUILIBRIUM PRICESEXCESS DEMANDEXCHANGE RATEEXCHANGE RATE VOLATILITYEXPECTED RETURNEXPORTEREXTERNALITIESEXTERNALITYFEDERAL RESERVEFINANCIAL CONSTRAINTFINANCIAL DEVELOPMENTFINANCIAL FRAGILITYFINANCIAL INTEGRATIONFINANCIAL INTERMEDIATIONFINANCIAL LIBERALIZATIONFINANCIAL MARKETSFINANCIAL SHOCKSFULL EMPLOYMENTGDPGDP PER CAPITAGENERAL EQUILIBRIUMGLOBAL IMBALANCESGLOBAL INVESTMENTGLOBAL LIQUIDITYGLOBAL MARKETSGLOBALIZATIONGOVERNMENT BONDGOVERNMENT BONDSGROSS CAPITAL FORMATIONGROSS DOMESTIC PRODUCTGROWTH RATEIMPORTIMPORTSINEFFICIENCYINELASTIC DEMANDINFLATIONINTEREST RATEINTEREST RATE DECLINESINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL FLOWSINTERNATIONAL CURRENCYINTERNATIONAL ECONOMICSINTERNATIONAL FINANCIAL INTEGRATIONINTERNATIONAL TRADEINVESTINGINVESTMENT DECISIONSINVESTMENT OPPORTUNITIESLABOR FORCELABOR MARKETLENDERLENDERSLEVERAGELIQUIDITYLIQUIDITY CONSTRAINTLIQUIDITY CONSTRAINTSLIQUIDITY PREMIUMLIQUIDITY PREMIUMSLOW INTEREST RATESM3MACROECONOMIC EFFECTSMACROECONOMICSMARGINAL PRODUCTMARGINAL PRODUCTIVITYMONETARY ECONOMICSMONETARY MODELMONETARY POLICYMORTGAGEMORTGAGE LOANSMULTIPLIERSNATIONAL CURRENCYNET CAPITALNET EXPORTSOPEN ECONOMYOPTIMIZATIONPERMANENT INCOMEPOLITICAL ECONOMYPRIVATE MONEYPRODUCTION INPUTSPRODUCTION OUTPUTPRODUCTIVITYPURCHASING POWERRANDOM VARIABLERATE OF RETURNRECESSIONRELIANCE ON COLLATERALREPOREPO MARKETRESERVE CURRENCIESRETURNSRISK SHARINGSAVINGSSECURITIESSEIGNIORAGESHARE OF CAPITALSHAREHOLDERSSOURCE OF UNCERTAINTYSTEADY STATESTEADY STATE LEVELSTEADY STATE LEVELSSTICKY WAGESSUBSTITUTION EFFECTSURPLUSTAXTAX REVENUESTOTAL OUTPUTTRADE BALANCETRADE BALANCESTRANSACTIONTRANSACTION COSTSTREASURIESTREASURYTREASURY RATEUNEMPLOYMENTUPWARD PRESSUREUSE OF COLLATERALVENTURE CAPITALISTWAGESWEALTHWORKING CAPITALWORLD DEVELOPMENT INDICATORSWorld Bank10.1596/1813-9450-6462