Global imbalances and the financial crisis: Link or no link?

No 346, BIS Working Papers from Bank for International Settlements

Abstract: Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries (the "excess saving" view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) drawing inferences about a country's cross-border financing activity based on observations of net capital flows; and (ii) explaining market interest rates through the saving-investment framework. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary economy. We conjecture that the main contributing factor to the financial crisis was not "excess saving" but the "excess elasticity" of the international monetary and financial system: the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms ("financial imbalances"). Credit creation, a defining feature of a monetary economy, plays a key role in this story.

Keywords: global imbalances; saving glut; money; credit; capital flows; current account; interest rates; financial crisis (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (411)

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