Global Imbalances and Financial Fragility

Ricardo Caballero () and Arvind Krishnamurthy

No 14688, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The U.S. is currently engulfed in the most severe financial crisis since the Great Depression. A key structural factor behind this crisis is the large demand for riskless assets from the rest of the world. In this paper we present a model to show how such demand not only triggered a sharp rise in U.S. asset prices, but also exposed the U.S. financial sector to a downturn by concentrating risk onto its balance sheet. In addition to highlighting the role of capital flows in facilitating the securitization boom, our analysis speaks to the broader issue of global imbalances. While in emerging markets the concern with capital flows is in their speculative nature, in the U.S. the risk in capital inflows derives from the opposite concern: capital flows into the U.S. are mostly non-speculative and in search of safety. As a result, the U.S. sells riskless assets to foreigners, and in so doing, it raises the effective leverage of its financial institutions. In other words, as global imbalances rise, the U.S. increasingly specializes in holding its "toxic waste."

JEL-codes: E44 F32 F37 G12 G15 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-bec, nep-cba and nep-mac
Note: AP EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (182)

Published as Ricardo J. Caballero & Arvind Krishnamurthy, 2009. "Global Imbalances and Financial Fragility," American Economic Review, American Economic Association, vol. 99(2), pages 584-88, May.

Downloads: (external link)
http://www.nber.org/papers/w14688.pdf (application/pdf)

Related works:
Journal Article: Global Imbalances and Financial Fragility (2009)
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:nbr:nberwo:14688

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14688

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().