The Demand for Liquid Assets and International Capital

In the recent decade, capital outows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we present a two-country dynamic model, with an emerging country and an industrial country, where excess saving may be generated by a demand for liquidity. This demand comes from constrained entrepreneurs in the emerging country. We show that the implications of this model for the international transmission of shocks are totally di¤erent from standard models. For example, a permanent productivity increase in the emerging country leads to a capital outow, a lower world interest rate and a positive spillover to the industrial country. On the other hand, shocks in the industrial country have little impact on the other country and on capital ows, which is consistent with their resilience during the recent crisis.