Global Imbalances and the Financial Crisis: Products of Common Causes
72 Pages Posted: 11 Jan 2010
Date Written: December 2009
This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Feds monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble.
Keywords: current account deficit, financial crisis, financial reform, global imbalances, housing bubble
JEL Classification: E44, E58, F32, F33, F42, G01, G15
Suggested Citation: Suggested Citation