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Macroeconomic Imbalances in the United States and Their Impact on the International Financial System

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  • Julia S. Perelstein
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    Abstract

    The argument put forward in this paper is twofold. First, the financial crisis of 2007-08 was made global by the current account deficit in the United States; and second, there is global dependence on the United States trade deficit as a means of maintaining liquidity in financial markets. The outflow of dollars from the United States was invested in U.S. capital markets, causing inflation in asset markets and leading to a bubble and bust in the subprime mortgage sector. Since the U.S. dollar is the international reserve currency, international debt is mostly denominated in dollars. Because there is a high degree of global financial integration, any reduction in the U.S. balance of trade will have negative effects on many countries throughout the world--for example, those countries dependent on exporting to the United States in order to finance their debt.

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    File URL: http://www.levyinstitute.org/pubs/wp_554.pdf
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    Bibliographic Info

    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_554.

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    Date of creation: Jan 2009
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    Handle: RePEc:lev:wrkpap:wp_554

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