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ABS inflows to the United States and the global financial crisis

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  • Bertaut, Carol
  • DeMarco, Laurie Pounder
  • Kamin, Steven
  • Tryon, Ralph
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    Abstract

    Relative to the “global savings glut” (GSG) hypothesis, we present a more complete picture of how capital flows contributed to the financial crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. The GSG hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. Foreign acquisitions of private-label ABS, primarily by Europeans, provided credit more directly and, by adding to domestic demand for these securities, contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Economics.

    Volume (Year): 88 (2012)
    Issue (Month): 2 ()
    Pages: 219-234

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    Handle: RePEc:eee:inecon:v:88:y:2012:i:2:p:219-234

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    Web page: http://www.elsevier.com/locate/inca/505552

    Related research

    Keywords: Capital flows; Global saving glut; Financial crisis; Asset-backed securities; Interest rates;

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    References

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    Cited by:
    1. Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies," Working Paper Series 44_13, The Rimini Centre for Economic Analysis.
    2. Carol C. Bertaut & Fang Cai & Nyssa Kim, 2013. ""Fool Me Once . . . " Did U.S. investors play it safer in the European debt crisis?," International Finance Discussion Papers 1088, Board of Governors of the Federal Reserve System (U.S.).

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