Global Imbalances and the Financial Crisis: Products of Common Causes

72 Pages Posted: 11 Jan 2010

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2009

Abstract

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 Fed’s 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

Obstfeld, Maurice and Rogoff, Kenneth S., Global Imbalances and the Financial Crisis: Products of Common Causes (December 2009). CEPR Discussion Paper No. DP7606, Available at SSRN: https://ssrn.com/abstract=1533211

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