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Bernanke “The Global Savings Glut and the U.S. Current Account Deficit” (2005)

Bernanke “The Global Savings Glut and the U.S. Current Account Deficit” (2005). Vaughan / Economics 639. Research Question. Why was the U.S. current account deficit so large? Related question: Why was U.S. savings rate so low? Note : Current Account = Exports - Imports

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Bernanke “The Global Savings Glut and the U.S. Current Account Deficit” (2005)

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  1. Bernanke“The Global Savings Glut and the U.S. Current Account Deficit” (2005) Vaughan / Economics 639

  2. Research Question • Why was the U.S. current account deficit so large? • Related question: Why was U.S. savings rate so low? Note: • Current Account = Exports - Imports • U.S. Net Foreign Borrowing = U.S. Current Account Deficit

  3. World Savings Glut Story • Developing world moved from net user to net supplier of funds in international capital markets in the late 1990s/early 2000s, largely in response to financial crises. • Savings flowed into the U.S., to take advantage of innovation/rising productivity (also because of sophistication of U.S. financial markets and special role of dollar as a reserve currency), which fueled an increase in equity prices (1996-2000). • After stock market correction (post 2000), inflow of savings pushed down real interest rates, which led to an increase in housing demand (rise in home prices).

  4. World Savings Glut Story • ↑ Demand for U.S. financial assets → ↑ Price of the Dollar • ↑ Price of Dollar → ↑ Imports, ↓ Exports [Current Account Deficit ↑ ] • ↑ U.S. Household Wealth (higher stock/house prices) → ↑ Consumption, ↓ Saving (also fueled import demand and contributed to current account deficit)

  5. Ingredients in Housing Bubble • Roberts: Households wanted to gamble with other people’s money. • Kling: Basle made mortgage-related securities attractive. • Taylor: Fed kept U.S. interest rates artificially low. • Bernanke: World savings glut pushed interest rates to record low levels in U.S. This time is different?

  6. Reinhart & Rogoff: Predictors of Financial CrisesSurge in Capital Inflows • Note that U.S. current account (capital inflow) was significantly larger.

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