Globalization, Gluts, Innovation or Irrationality; What Explains the Easy Financing of the U.S. Current Account Deficit?
Volodymyr Tulin and
No 07/160, IMF Working Papers from International Monetary Fund
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)
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