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Global Imbalances and the Financial Crisis

  • Karl Whelan

    (University College Dublin)

Did global imbalances cause the financial crisis? A number of influential figures have argued that inflows of foreign capital into the US due to the current account deficit helped to trigger the crisis. This paper argues that the evidence for this position is weak. The capital inflows into the US associated with the current account deficit were also not the key factor driving foreign purchases of US toxic assets. The so-called global savings glut was not as significant a pattern as is often presented. Macroeconomic policies that reduced global imbalances could have been adopted but these would probably not have prevented the crisis. Global policy efforts to prevent a recurrence of the financial crisis need to focus on improved banking regulation. Reducing global imbalances should be of secondary importance.

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File URL: http://www.ucd.ie/t4cms/wp10_13.pdf
File Function: First version, 2010
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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201013.

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Length: 21 pages
Date of creation: 15 Apr 2010
Date of revision:
Handle: RePEc:ucn:wpaper:201013
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