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What Caused the Global Financial Crisis - Evidence on the Drivers of Financial Imbalances 1999 - 2007

Author/Editor: Nier, Erlend | Merrouche, Ouarda
Authorized for Distribution: December 1, 2010
Electronic Access: Free Full Text (PDF file size is 825KB)
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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 investigates empirically the drivers of financial imbalances ahead of the global financial crisis. Three factors may have contributed to the build-up of financial imbalances: (i) rising global imbalances (capital flows), (ii) monetary policy that might have been too loose, (iii) inadequate supervision and regulation. Panel data regressions are performed for OECD countries from 1999 to 2007, so as to shed light on the relative importance of these factors, as well as the extent to which these factors might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up is amplified where the supervisory and regulatory environment was relatively weak. We find that, by contrast, differences in monetary policy cannot account for differences across countries in the build-up of financial imbalances ahead of the crisis.
 
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Series: Working Paper No. 10/265
Subject(s): Balance of trade | Bank credit | Bank regulations | Bank supervision | Capital flows | Capital inflows | Cross country analysis | Current account balances | Financial crisis | Financial sector | Global Financial Crisis 2008-2009 | Monetary policy
Author's keyword(s): Global imbalances | monetary policy | supervision and regulation
 
English  
    Published:   December 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010265   Pages:   63
    Price:   US$18.00
       
     
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