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The Welfare Cost of the Us Current Account Deficits on Developing Countries

In this paper I analyze the effect of the recent global imbalances on developing countries. The theoretical model developed shows that the increase in the US borrowing from the financial markets decreases borrowing opportunities of the developingcountries. The decrease in the credit availability of the developing countries decreases the current account deficits that they are running. This effect is actually very similar what we observed in sudden stop cases in 1990s and 2000s in developing countries. Moreover, as the US borrowing goes up, the agents’ expectation about the future borrowing opportunities changes. The reduced borrowing opportunity for the future distorts the production process and it decreases the welfare.