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Will Sub-Prime be a Twin Crisis for the United States?

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  • Michael P. Dooley
  • David Folkerts-Landau
  • Peter M. Garber

Abstract

We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis. Copyright � 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 17 (2009)
Issue (Month): 4 (09)
Pages: 655-666

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Handle: RePEc:bla:reviec:v:17:y:2009:i:4:p:655-666

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  1. Michael P Dooley & David Folkerts-Landau & Peter Garber, 2006. "Interest rates, exchange rates and international adjustment," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 51.
  2. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  3. Michael P. Dooley & Peter M. Garber & David Folkerts-Landau, 2007. "The Two Crises of International Economics," NBER Working Papers 13197, National Bureau of Economic Research, Inc.
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Cited by:
  1. Chris Hunt, 2008. "Financial turmoil and global imbalances: the end of Bretton Woods II?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, September.
  2. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2009. "Bretton Woods II Still Defines the International Monetary System," NBER Working Papers 14731, National Bureau of Economic Research, Inc.
  3. Lev Ratnovski & Rocco Huang, 2010. "The Dark Side of Bank Wholesale Funding," IMF Working Papers 10/170, International Monetary Fund.
  4. Huang, R. & Ratnovksi, L., 2009. "The Dark Side of Bank Wholesale Funding," Discussion Paper 2009-59 S, Tilburg University, Center for Economic Research.
  5. Astley, Mark & Giese, Julia & Hume, Michael & Kubelec, Chris, 2009. "Global imbalances and the financial crisis," Bank of England Quarterly Bulletin, Bank of England, vol. 49(3), pages 178-190.
  6. Kenc, Turalay & Dibooglu, Sel, 2010. "The 2007-2009 financial crisis, global imbalances and capital flows: Implications for reform," Economic Systems, Elsevier, vol. 34(1), pages 3-21, March.
  7. Piffaretti, Nadia F., 2009. "Reshaping the international monetary architecture : lessons from Keynes'plan," Policy Research Working Paper Series 5034, The World Bank.

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