Global liquidity glut or global savings glut? A structural VAR approach
AbstractSince the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy: (i) monetary shocks (“excess liquidity” hypothesis), (ii) preference shocks (“savings glut” hypothesis), and (iii) investment shocks (“investment drought” hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that savings shocks and investment shocks explain less of the variation. Hence, a “liquidity glut” may have been a more important driver of real and financial imbalances in the US and emerging Asia than a “savings glut”. JEL Classification: E2, F32, F41, G15
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0911.
Date of creation: Jun 2008
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Find related papers by JEL classification:
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- NEP-ALL-2008-07-20 (All new papers)
- NEP-BEC-2008-07-20 (Business Economics)
- NEP-CBA-2008-07-20 (Central Banking)
- NEP-MAC-2008-07-20 (Macroeconomics)
- NEP-MON-2008-07-20 (Monetary Economics)
- NEP-OPM-2008-07-20 (Open Economy Macroeconomic)
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