A simple model of an oil-based global savings glut - the “China factor”and the OPEC cartel
Ansgar Belke and Daniel Gros have published an article in International Economics and Economic Policy, September 2014, Volume 11, Issue 3, pp 413-430. Entitled “A simple model of an oil-based global savings glut—the ‘China factor’ and the OPEC cartel”, this contribution illustrates the interaction between oil prices and the global savings equilibrium, which can invert the usual IS-type relationship between growth and interest rates. Higher growth is usually associated with higher interest rates. But higher growth leads to also to higher oil prices and hence to higher savings by oil producers. This mechanism might explain the ‘conundrum’ noted by Bernanke that during the last expansion global interest rates remained relatively low despite robust growth. Moreover, it has interesting implications for how one views the huge US current account deficit and how the emergence of China’s savings surplus and oil supply shocks impact the global economy. We show that the new equilibrium is not only located at a lower interest rate but also at a lower growth rate than without the China effect. Finally, we argue that the lower real interest rates resulting from excess OPEC savings have facilitated the adjustment to the subprime crisis.
Ansgar Belke is Full Professor of Macroeconomics and Director of the Institute of Business and Economic Studies (IBES) at the University of Duisburg-Essen. Since 2012 he is (ad personam) Jean Monnet Professor. Daniel Gros is Director of CEPS.
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