19 Pages Posted: 20 Jan 2014
Date Written: December 2013
Consider two views of the global financial crisis. One view looks across the border: it blames external imbalances, the unprecedented current account deficits and surpluses in recent years. Another view looks within the border: it faults domestic financial systems where risks originated in excessive credit booms. We can use the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. The credit boom explanation is the most plausible predictor of crises since the late nineteenth century; global imbalances have only a weak correlation with financial distress compared to indicators drawn from the financial system itself.
Keywords: Financial crisis, Current account, Credit expansion, Capital flows, Business cycles, Financial crises, financial openness, capital controls, external imbalances, credit booms, recessions, banking crisis, banking crises, capital mobility, global financial crisis, financial distress, bank panics, public debts, economic crisis, reserve requirements, current account deficits, crisis problem, currency risks, private debt, current accounts, asset bubbles, rating agencies, government deficits, reserve accumulation, deposit insurance, fiscal crisis, financial integration
JEL Classification: E30, E40, E50, F4, F3, N10
Suggested Citation: Suggested Citation
Taylor, Alan M., External Imbalances and Financial Crises (December 2013). IMF Working Paper No. 13/260. Available at SSRN: https://ssrn.com/abstract=2381856
By Peter Temin