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Global Imbalances and the Paradox of Thrift

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  • W. Max Corden

    (Department of Economics, The University of Melbourne)

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    Abstract

    Global imbalances refer to current account surpluses and deficits. This is a form of international intertemporal trade, and the neoclassical approach suggests that there are gains from trade, and hence there may be no problem created by global imbalances. This paper presents qualifications to this argument. A crucial concept is the "return journey", namely the need for borrowers to pay interest (or dividends) and eventually to be able to repay. Thus savings must lead to investment, which provides the future resources to enable the return journey. If borrowing is used to finance current consumption, wars, or unwise ("unfruitful") investment, such as excessive housing construction, the result will be a crisis. In this way the high net savings of some countries actually led to the recent crisis. This is a new version of Keynes’ “paradox of thrift” The central issue on which this paper focuses is the failure of high net savings by the “savings glut” countries to lead to fruitful investment in other countries, both in the United States and in developing countries. Hence a crisis was caused by the lack of provision for the return journey.

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    Bibliographic Info

    Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2011n20.

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    Length: 23 pages
    Date of creation: Jul 2011
    Date of revision:
    Handle: RePEc:iae:iaewps:wp2011n20

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    Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
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    Related research

    Keywords: Global imbalances; paradox of thrift; financial crisis; instability of capital flows; world savings glut; quantitative easing;

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    1. Corden, W. Max., 1997. "Trade Policy and Economic Welfare," OUP Catalogue, Oxford University Press, edition 2, number 9780198775348, September.
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    Cited by:
    1. Andrew Hughes Hallett & Juan Carlos Martinez Oliva, 2011. "Global Imbalances in a World of Inflexible Real Exchange Rates and Capital Controls," Macroeconomics Working Papers 23206, East Asian Bureau of Economic Research.

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