External Imbalances and Financial Crises

Alan Taylor

No 18606, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself.

JEL-codes: E3 E4 E5 F3 F4 N1 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-cba, nep-his, nep-ifn, nep-mac and nep-opm
Note: DAE IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published as 6. External Imbalances and Financial Crises Alan M. Taylor Financial Crises: Causes, Consequences, and Policy Responses Author/Editor: Stijn Claessens, M Ayhan Kose, Luc Laeven, Fabian Valencia Release Date: © February, 2014 ISBN : 978-1-47554-340-7
Published as Alan Taylor, 2013. "External Imbalances and Financial Crises," IMF Working Papers, vol 13(260).

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Working Paper: External Imbalances and Financial Crises (2013)
Working Paper: External Imbalances and Financial Crises (2012)
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