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Global imbalances and the paradox of thrift

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  • W. Max Corden

Abstract

This paper analyses the relationship between the global imbalances and the financial crisis. The imbalances were connected with the increase in world savings emanating from the ‘savings glut’ countries, notably China. This increase in savings led to a decline in world interest rates, and thus to greater borrowing, especially in the United States. This borrowing was for financing consumption, wars, and unwise rather than fruitful investment, especially in housing. The failure to invest in fruitful investments led to the financial crisis, and thus the decline in US and world-wide aggregate demand. This was the indirect paradox of thrift. It is to be contrasted with Keynes’s paradox of thrift, where the decline in aggregate demand and output would have resulted directly from the rise in world savings. The paper also discusses why there was not more borrowing for fruitful investment, especially in developing countries, hence avoiding the financial crisis. Copyright 2013, Oxford University Press.

Suggested Citation

  • W. Max Corden, 2013. "Global imbalances and the paradox of thrift," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 28(3), pages 431-443, AUTUMN.
    • Handle: RePEc:oup:oxford:v:28:y:2013:i:3:p:431-443
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    File URL: http://hdl.handle.net/10.1093/oxrep/grs027
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    1. is not listed on IDEAS
    2. repec:spo:wpmain:info:hdl:2441/53r60a8s3kup1vc9l564n09r8 is not listed on IDEAS
    3. Mario Amendola & Jean-Luc Gaffard & Francesco Saraceno, 2012. "Production Process Heterogeneity, Time to Build, and Macroeconomic Performance," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 263-294.
    4. Körner, Finn Marten, 2011. "An equilibrium model of 'global imbalances' revisited," Violette Reihe: Schriftenreihe des Promotionsschwerpunkts "Globalisierung und Beschäftigung" 33/2011, University of Hohenheim, Carl von Ossietzky University Oldenburg, Evangelisches Studienwerk.
    5. Andrew Hughes Hallett & Juan Carlos Martinez Oliva, 2012. "Global Imbalances in a World of Inflexible Real Exchange Rates and Capital Controls," Global Economic Review, Taylor & Francis Journals, vol. 41(4), pages 319-340, December.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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