EconPapers    
Economics at your fingertips  
 

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

Claudio Borio and Piti Disyatat

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (405) Track citations by RSS feed

Downloads: (external link)
http://www.bis.org/publ/work346.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/work346.htm (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:346

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Christian Beslmeisl ().

 
Page updated 2024-02-23
Handle: RePEc:bis:biswps:346