Explanation on Global Imbalance
Global imbalance has become one of the most attractive and arguable problem in the field of word economy. Literature on the inducement and sustainability of global imbalance are numerous. Based on the different respective, the researchers have draw the different conclusion. Based on the observation of the world economy and global financial marker, we can find that with the process of financial openness, the heterogeneity of financial deepness still exists in a large range as before.
America as the country with most developed financial market and highest degree of financial deepness has held a large negative NFA position and the structure of the NFA represents as a decrease of holding of riskless asset and a increase of holding of risky asset such as FDI. Under the financial integration, the heterogeneity of financial deepness across the countries is prevalent, and this heterogeneity can be read as one of the factors to explain the global imbalance.
Combined with the character of the studying subject, we use Dynamic Stochastic General Equilibrium (DSGE) model which is popular in macroeconomic study to analyze the problem. After the setting of the parameter of financial deepness and basis economy circumstance, we can make a theoretical model and get some useful conclusion from the model. To make the theoretical conclusion more persuasive, we used matlab 7.0 to make a simulation of the model and did robustness analysis of the model. After the above analysis, we can draw the same conclusion as drew from theoretical model.
This article studies the relation between the heterogeneity of financial deepness and global imbalance it tries to show that countries with more advanced financial market deepness accumulate foreign liabilities in gradual and long-lasting process, the difference in financial deepness also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of productive asset such as FDI and non-diversifiable equity.