What Caused the Global Financial Crisis: Evidenceon the Drivers of Financial Imbalances 1999: 2007

Ouarda Merrouche and Erlend Nier

No 2010/265, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates empirically the drivers of financial imbalances ahead of the global financial crisis. Three factors may have contributed to the build-up of financial imbalances: (i) rising global imbalances (capital flows), (ii) monetary policy that might have been too loose, (iii) inadequate supervision and regulation. Panel data regressions are performed for OECD countries from 1999 to 2007, so as to shed light on the relative importance of these factors, as well as the extent to which these factors might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up is amplified where the supervisory and regulatory environment was relatively weak. We find that, by contrast, differences in monetary policy cannot account for differences across countries in the build-up of financial imbalances ahead of the crisis.

Keywords: WP; monetary policy stance; Taylor rule; bank deposit; balance sheet; central bank; Global imbalances; monetary policy; supervision and regulation; stance need; extent monetary policy; inflation rate; nominal rate; accommodative monetary policy stance; current account position; endogenous monetary policy response; monetary policy response; Current account; Capital flows; Commercial banks; Bank credit; Capital inflows; Global (search for similar items in EconPapers)
Pages: 64
Date: 2010-11-01
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Citations: View citations in EconPapers (64)

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