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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
Authorized for Distribution: July 1, 2007
Electronic Access: Free Full Text (PDF file size is 479KB)
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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(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  
    Published:   July 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007160   Pages:   39
    Price:   US$18.00
       
     
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