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Globalization, Gluts, Innovation or Irrationality; What Explains the Easy Financing of the U.S. Current Account Deficit?

Ravi Balakrishnan, Volodymyr Tulin and Tamim Bayoumi

No 07/160, IMF Working Papers from International Monetary Fund

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 are also important, 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.

Keywords: Current account; Deficit financing; Financial instruments; External debt; Economic models; Globalization; United States; U.S. Current Account, Financing, Home Bias, Global Savings Glut, Portfolio Balance, ICAPM, ic, bond, bonds, financial innovation, bond markets, U.s Current Account, (search for similar items in EconPapers)
Date: 2007-07-01
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