Growth Differentials, the Life-Cycle Hypothesis and the Allocation Puzzle
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| Title | Growth Differentials, the Life-Cycle Hypothesis and the Allocation Puzzle
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| Author | Yao Yang and Zou Jingxian |
| Organization | Peking University |
| Email | yyao@nsd.pku.edu.cn；zoujingxian@gmail.com |
| Key Words | the allocation puzzle; current accounts; global imbalances |
| Abstract | We propose an explanation for the allocation puzzle based on the life-cycle hypothesis. In 2-period overlapping generation model, ceteris paribus, a country with a higher growth rate registers larger excessive capital supply in autarky. Consequently, interest rates are lower in faster-growing countries. In an open world economy, capital then flows from faster-growing countries to countries growing more slowly. However, the strength of finance and the composition of trading partners can alter this relationship. Our empirical results find that this relationship not only holds at the global level, but also among developed countries when the average growth rates of their corresponding trading partners are controlled. |
| Serial Number | WP869 |
| Time | 2015-05-12 |
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