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

41 Pages Posted: 23 Aug 2007

See all articles by Ravi Balakrishnan

Ravi Balakrishnan

International Monetary Fund (IMF) - Fiscal Affairs Department

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Volodymyr Tulin

International Monetary Fund (IMF)

Date Written: July 2007

Abstract

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.

Keywords: Working Paper, Current account, United States, External debt, Deficit financing, Financial instruments, Globalization, Savings, Economic models

Suggested Citation

Balakrishnan, Ravi and Bayoumi, Tamim and Tulin, Volodymyr, Globalization, Gluts, Innovation or Irrationality: What Explains the Easy Financing of the U.S. Current Account Deficit? (July 2007). IMF Working Papers, Vol. , pp. 1-39, 2007. Available at SSRN: https://ssrn.com/abstract=1007909

Ravi Balakrishnan (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States
001 202 623 5674 (Phone)
001 202 623 6249 (Fax)

Tamim Bayoumi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Volodymyr Tulin

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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