43 Pages Posted: 8 Jun 2011
Date Written: May 1, 2011
Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries (the "excess saving" view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) drawing inferences about a country's cross-border financing activity based on observations of net capital flows; and (ii) explaining market interest rates through the saving-investment framework. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary economy. We conjecture that the main contributing factor to the financial crisis was not "excess saving" but the "excess elasticity" of the international monetary and financial system: the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms ("financial imbalances"). Credit creation, a defining feature of a monetary economy, plays a key role in this story.
Keywords: global imbalances, saving glut, money, credit, capital flows, current account, interest rates, financial crisis
JEL Classification: E40, E43, E44, E50, E52, F30, F40
Suggested Citation: Suggested Citation
Borio, Claudio E. V. and Disyatat, Piti, Global Imbalances and the Financial Crisis: Link or No Link? (May 1, 2011). BIS Working Paper No. 346. Available at SSRN: https://ssrn.com/abstract=1859410 or http://dx.doi.org/10.2139/ssrn.1859410
By Cédric Tille