Global Liquidity, World Savings Glut and Global Policy Coordination
AbstractThe global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both originate in the combination of economic policies adopted by the two key economies, the US and China. Global financial markets served as a transmission belt, both during the boom as during the bust. In the US, the interaction among the Fed's monetary stance, global real interest rates, distorted incentives in credit markets, and financial innovation created the mix of conditions which first drove growth, but then made the US the epicenter of the global financial crisis. Exchange rate and other economic policies followed by emerging markets such as China and the oil-exporting countries contributed to the US ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble during the upswing. But we find that the key drivers of asset prices are global liquidity conditions. Central banks flooded the markets with ample liquidity. Mopping up this excess liquidity will be one major task for central banks worldwide, which needs to be done in a coordinated fashion. Moreover, our analysis has shown that liquidity will first show up in asset price inflation and only later in consumer goods inflation. This renders it difficult for central bank to exit from their current very expansive monetary policy stance if they continue to focus only on price stability.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 973.
Length: 19 p.
Date of creation: 2010
Date of revision:
Asset prices; China; current account adjustment; global liquidity; oil prices; savings glut; monetary policy; policy coordination;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-27 (All new papers)
- NEP-CBA-2010-02-27 (Central Banking)
- NEP-MAC-2010-02-27 (Macroeconomics)
- NEP-MON-2010-02-27 (Monetary Economics)
- NEP-OPM-2010-02-27 (Open Economy Macroeconomics)
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- Kristina Spantig, 2012. "International monetary policy spillovers in an asymmetric world monetary system - The United States and China," Global Financial Markets Working Paper Series 2012-33, Friedrich-Schiller-University Jena.
- Kristina Spantig, 2013. "Keynesian Dominance in Crisis Therapy," Global Financial Markets Working Paper Series 45-2013, Friedrich-Schiller-University Jena.
- Giancarlo Bertocco, 2011. "Global Saving Glut and housing bubble: a critical analysis," Economics and Quantitative Methods, Department of Economics, University of Insubria qf1112, Department of Economics, University of Insubria.
- Steiner, Andreas, 2014. "Current account balance and dollar standard: Exploring the linkages," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 65-94.
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