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Globalization, Gluts, innovation or Irrationality

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  • Ravi Balakrishnan
  • Volodymyr Tulin
  • Tamim Bayoumi

Abstract

This paper examines the roles of U.S. financial innovation, financial globalization, and the savings glut hypothesis in explaining the rise in U.S. external debt, first in a portfolio balance model, and then empirically. Perhaps surprisingly, financial deepening and falling home bias in industrialized countries explain a large share of external financing. The savings glut hypothesis (including difficult-to-track petrodollar recycling) and U.S. financial innovation are also important, in part as a cause of declining home bias in industrialized countries. The latter underscores the importance of not looking at these factors in isolation, but rather as a constellation of forces that can be self-reinforcing.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/160.

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Length: 39
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/160

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Keywords: External debt; Deficit financing; Financial instruments; Economic models; bond; bonds; financial innovation; bond markets; bond market; government bonds; financial markets; government bond; financial globalization; international capital; corporate bond; bond yields; corporate bonds; stock adjustment; global bond; financial market; foreign bond; foreign bonds; government bond yields; bond flows; international finance; financial stability; private bonds; global bond portfolio; domestic bond; private bond; term bonds; long term bonds; net bond; global bond markets; global bond market; domestic bond markets; bond portfolio; international bond; government bond markets; financial deregulation; bond rates; financial structure; financial systems; bond purchases; corporate ? bond; regional bond markets; treasury bonds; portfolio investment; corporate bond market; bond spreads; financial volatility; treasury bond; financial system; bond flow; local ? bonds; issuance of bonds; government bond market; currency risk;

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References

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  1. Blanchard, Olivier & Giavazzi, Francesco & Sa, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
  2. Ricardo J Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An equilibrum model of "global imbalances" and low interest rates," BIS Working Papers 222, Bank for International Settlements.
  3. Xafa, Miranda, 2007. "Global imbalances and financial stability," Journal of Policy Modeling, Elsevier, vol. 29(5), pages 783-796.
  4. Carol C. Bertaut & William L. Griever, 2004. "Recent developments in cross-border investment in securities," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Win, pages 19-31.
  5. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  6. Charles P. Thomas, 2006. "The Performance of International Equity Portfolios," The Institute for International Integration Studies Discussion Paper Series iiisdp162, IIIS.
  7. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  8. Steven B. Kamin & Trevor A. Reeve & Nathan Sheets, 2007. "U.S. external adjustment: is it disorderly? Is it unique? Will it disrupt the rest of the world?," International Finance Discussion Papers 892, Board of Governors of the Federal Reserve System (U.S.).
  9. Ravi Balakrishnan & Volodymyr Tulin, 2006. "U.S. Dollar Risk Premiums and Capital Flows," IMF Working Papers 06/160, International Monetary Fund.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  11. Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2006. "The Performance of International Equity Portfolios," NBER Working Papers 12346, National Bureau of Economic Research, Inc.
  12. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
  13. Miranda Xafa, 2007. "Global Imbalances and Financial Stability," IMF Working Papers 07/111, International Monetary Fund.
  14. Francis E. Warnock & Chad Cleaver, 2002. "Financial centers and the geography of capital flows," International Finance Discussion Papers 722, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Joseph W. Gruber & Steven B. Kamin, 2008. "Do differences in financial development explain the global pattern of current account imbalances?," International Finance Discussion Papers 923, Board of Governors of the Federal Reserve System (U.S.).

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