In a period of rapid integration and accelerated growth in emerging markets, three striking trends have been (1) a large and persistent increase in the private savings rate in emerging markets and fall in advanced economies, (2) large net capital outflows away from emerging markets, and (3) a sustained decline in the world interest. We add an additional important fact: private savings is the main driver of the cross-sectional variation in the current account in the past data. Standard models do poorly in accounting for these facts. We show that incorporating asymmetric household credit constraints in a global general-equilibrium model can deliver qualitatively consistent and quantitatively significant results. An important implication of our model is that countries with identical preferences may see opposite responses of the savings rate to changes in the common world interest rate.
