Global current account imbalances and the net capital flows they entail have been at the forefront of policy debates in recent years. In the wake of the financial crisis, many observers and policymakers have singled them out as a key factor contributing to the turmoil. A prominent view is that an excess of saving over investment in emerging market countries, as reflected in corresponding current account surpluses, eased financial conditions in deficit countries and exerted significant downward pressure on world interest rates. In so doing, this flow of saving helped to fuel a credit boom and risk-taking in major advanced economies, particularly in the United States, thereby sowing the seeds of the global financial crisis.
This paper argues that such a view, henceforth the excess saving (ES) view, and its focus on saving investment balances, current accounts and net capital flows bears reconsideration. The central theme of the ES story hinges on two hypotheses, which appear to various degrees in specific accounts: (i) net capital flows from current account surplus countries to deficit ones helped to finance credit booms in the latter; and (ii) a rise in ex ante global saving relative to ex ante investment in surplus countries depressed world interest rates, particularly those on US dollar assets, in which much of the surpluses are seen to have been invested. Our critique addresses each of these hypotheses in turn.
Our objection to the first is that a focus on current accounts in the analysis of cross-border capital flows diverts attention away from the global financing patterns that are at the core of financial fragility. By construction, current accounts and net capital flows reveal little about financing. They capture changes in net claims on a country arising from trade in real goods and services and hence net resource flows. But they exclude the underlying changes in gross flows and their contributions to existing stocks, including all the transactions involving only trade in financial assets, which make up the bulk of cross-border financial activity.
As such, current accounts tell us little about the role a country plays in international borrowing, lending and financial intermediation, about the degree to which its real investments are financed from abroad, and about the impact of cross-border capital flows on domestic financial conditions. Moreover, we argue that in assessing global financing patterns, it is sometimes helpful to move away from the residency principle, which underlies the balance-of-payments statistics, to a perspective that consolidates operations of individual firms across borders. By looking at gross capital flows and at the salient trends in international banking activity, we document how financial vulnerabilities were largely unrelated to or, at the least, not captured by global current account imbalances.
contents
Introduction
I. The excess saving view: hypothesis and stylised facts
II. The excess saving view and global financing patterns
Saving versus financing: the closed economy case
Saving versus financing: the open economy case
A broader perspective on global financial flows
The market rate versus the natural rate
IV. The international monetary and financial system: excess elasticity?
Conclusion
Annex: Real vs monetary analysis and the determination of the interest rate
References
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Global imbalances and the financial crisis: Link or no link?
