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Globalization, Gluts, Innovation or Irrationality; What Explains the Easy Financing of the U.S. Current Account Deficit?


  • Ravi Balakrishnan
  • Volodymyr Tulin
  • Tamim Bayoumi


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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  • Ravi Balakrishnan & Volodymyr Tulin & Tamim Bayoumi, 2007. "Globalization, Gluts, Innovation or Irrationality; What Explains the Easy Financing of the U.S. Current Account Deficit?," IMF Working Papers 07/160, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/160

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    References listed on IDEAS

    1. Warnock, Francis E & Cleaver, Chad, 2003. "Financial Centres and the Geography of Capital Flows," International Finance, Wiley Blackwell, vol. 6(1), pages 27-59, Spring.
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    3. Steven B. Kamin & Trevor A. Reeve & Nathan Sheets, 2009. "U.S. External Adjustment: Is It Disorderly? Is It Unique? Will It Disrupt The Rest Of The World?," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 265-292, April.
    4. 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.
    5. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
    6. Thomas, Charles P. & Warnock, Francis E. & Wongswan, Jon, 2004. "The Performance of International Equity Portfolios," International Finance Discussion Papers 817, Board of Governors of the Federal Reserve System (U.S.), revised Oct 2004.
    7. Xafa, Miranda, 2007. "Global imbalances and financial stability," Journal of Policy Modeling, Elsevier, vol. 29(5), pages 783-796.
    8. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    9. Miranda Xafa, 2007. "Global Imbalances and Financial Stability," IMF Working Papers 07/111, International Monetary Fund.
    10. 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 253-266, April.
    11. 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.
    12. Blanchard, Olivier & Giavazzi, Francesco & Sá, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
    13. Ravi Balakrishnan & Volodymyr Tulin, 2006. "U.S. Dollar Risk Premiums and Capital Flows," IMF Working Papers 06/160, International Monetary Fund.
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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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