Rhyme or Reason: What Explains the Easy Financing of the U.S. Current Account Deficit&quest

Ravi Balakrishnan, Tamim Bayoumi and Volodymyr Tulin

IMF Staff Papers, 2009, vol. 56, issue 2, 410-445

Abstract: This paper examines the roles of U.S. financial innovation, financial globalization, and the savings glut hypothesis in explaining the rise in U.S. external debt, first in a portfolio balance model, and then empirically. Perhaps surprisingly, financial deepening and falling home bias in industrialized countries explain a large share of external financing. The savings glut hypothesis (including difficult-to-track petrodollar recycling) and U.S. financial innovation also play a role, in part as a cause of declining home bias in industrialized countries. The latter underscores the importance of not looking at these factors in isolation, but rather as a constellation of forces that can be self-reinforcing. IMF Staff Papers (2009) 56, 410–445. doi:10.1057/imfsp.2009.11

Date: 2009
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