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

Author/Editor:

Ravi Balakrishnan ; Volodymyr Tulin ; Tamim Bayoumi

Publication Date:

July 1, 2007

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 07/160

Subject:

English

Publication Date:

July 1, 2007

ISBN/ISSN:

9781451867244/1018-5941

Stock No:

WPIEA2007160

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

39

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