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External Imbalances and Financial Crises

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  • Taylor, Alan M.

Abstract

In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9255.

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Date of creation: Dec 2012
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Handle: RePEc:cpr:ceprdp:9255

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Keywords: credit booms; external imbalances; financial crises;

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References

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  1. Maurice Obstfeld, 2012. "Does the Current Account Still Matter?," NBER Working Papers 17877, National Bureau of Economic Research, Inc.
  2. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
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Cited by:
  1. Douglas Sutherland & Peter Hoeller, 2014. "Growth Policies and Macroeconomic Stability," OECD Economic Policy Papers 8, OECD Publishing.
  2. Christopher L. Colvin & Abe de Jong & Philip T. Fliers, 2013. "Predicting the Past: Understanding the Causes of Bank Distress in the Netherlands in the 1920s," Working Papers 0035, European Historical Economics Society (EHES).
  3. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.

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