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Rhyme or Reason: What Explains the Easy Financing of the U.S. Current Account Deficit?

  • Ravi Balakrishnan
  • Tamim Bayoumi
  • Volodymyr Tulin

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 also play a role, 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. IMF Staff Papers (2009) 56, 410–445. doi:10.1057/imfsp.2009.11

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Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 56 (2009)
Issue (Month): 2 (June)
Pages: 410-445

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Handle: RePEc:pal:imfstp:v:56:y:2009:i:2:p:410-445
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