Globalization, Gluts, Innovation or Irrationality: What Explains the Easy Financing of the U.S. Current Account Deficit?
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. 2007/160
Subject:
Bonds Emerging and frontier financial markets Foreign assets Securities markets Sovereign bonds
English
Publication Date:
July 1, 2007
ISBN/ISSN:
9781451867244/1018-5941
Stock No:
WPIEA2007160
Pages:
39
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