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Will Subprime be a Twin Crisis for the United States?

  • Michael P. Dooley
  • David Folkerts-Landau
  • Peter M. Garber

We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis.

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File URL: http://www.nber.org/papers/w13978.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13978.

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Date of creation: May 2008
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Publication status: published as Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2009. "Will Sub-Prime be a Twin Crisis for the United States?," Review of International Economics, Blackwell Publishing, vol. 17(4), pages 655-666, 09.
Handle: RePEc:nbr:nberwo:13978
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  1. 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.
  2. Michael P Dooley & David Folkerts-Landau & Peter Garber, 2006. "Interest rates, exchange rates and international adjustment," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 51.
  3. Michael P. Dooley & Peter M. Garber & David Folkerts-Landau, 2007. "The Two Crises of International Economics," NBER Working Papers 13197, National Bureau of Economic Research, Inc.
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