Pension systems and financial constraints in a three-country OLG model of intra-EMU and global trade imbalances

Farmer and Ban (2014) find in a three-country OLG model (= basic model) that financial integration between both EMU core and periphery and between Asia and USA induce trade surpluses in EMU core and in Asia while in EMU periphery and in USA trade balances become negative when the global economy is dynamically inefficient. While exhibiting the right sign, model-generated steady-state trade balance to GDP ratios turn out, however, being too low compared to empirical counterparts. In order to address this problem we first extend the basic OLG model in line with Eugeni (2015) by introducing pay-as-you-go pension systems in EMU and US but not in Asia. Second, we introduce financial constraints following Coeurdacier et al. (2015) to achieve a better data fit compared to the basic model. Both extensions improve the empirical relevance of the basic model.