Global Imbalances and the Financial Crisis: Reassessing the Role of International Finance

  • Citation: Borio, Claudia, and Piti Disyatat. “Global Imbalances and the Financial Crisis: Reassessing the Role of International Finance.” Asian Economic Policy Review 5, no. 2 (2010): 198–216.
    • Topics:
    • Business and Trade
    • Keywords:
    • capital flow
    • credit
    • financial crisis
    • global imbalance
    • interest rate
    • saving glut

Global current account imbalances have recently been singled out by many as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have put significant downward pressure on world interest rates, thereby fueling a credit boom and risk taking in major advanced economies with current account deficits (the “excess saving” view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) explaining market interest rates through the saving-investment framework; and (ii) drawing inferences about a country’s cross-border financing activity based on observations of net capital flows. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary (credit) economy. We conjecture that the main macroeconomic cause of the financial crisis was not “excess saving” but the “excess elasticity” of the international monetary and financial system.

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