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

 
Author/Editor: Balakrishnan, Ravi ; Bayoumi, Tamim ; Tulin, Volodymyr
 
Publication Date: July 01, 2007
 
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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(s): Current account | United States | External debt | Deficit financing | Financial instruments | Globalization | Savings | Economic models

Author's Keyword(s): U.S current account | financing | home bias | global savings glut | portfolio balance | ICAPM
 
English
Publication Date: July 01, 2007
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2007160 Pages: 39
Price:
US$18.00 (Academic Rate:
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