Global imbalances and the financial crisis:Link or no link?
Claudio Borio and Piti Disyatat
Global current account imbalances have been at the forefront of policy debates over the pastfew years. Many observers have recently singled them out as a key factor contributing to theglobal financial crisis. Current account surpluses in several emerging market economies aresaid to have helped fuel the credit booms and risk-taking in the major advanced deficitcountries at the core of the crisis, by putting significant downward pressure on world interestrates and/or by simply financing the booms in those countries (the “excess saving” view). Weargue that this perspective on global imbalances bears reconsideration. We highlight twoconceptual problems: (i) drawing inferences about a country’s cross-border financing activitybased on observations of
capital flows; and (ii) explaining
interest rates throughthe saving-investment framework. We trace the shortcomings of this perspective to a failureto consider the distinguishing characteristics of a monetary economy. We conjecture that themain contributing factor to the financial crisis was not “excess saving” but the “excesselasticity” of the international monetary and financial system: the monetary and financialregimes in place failed to restrain the build-up of unsustainable credit and asset price booms(“financial imbalances”). Credit creation, a defining feature of a monetary economy, plays akey role in this story.JEL Classification: E40, E43, E44, E50, E52, F30, F40.Keywords: Global imbalances, saving glut, money, credit, capital flows, current account,interest rates, financial crisis.
An abridged version of this paper has been published with the title “Global imbalances and the financial crisis:Reassessing the role of international finance” in
Asian Economic Policy Review
(2010) vol. 5, no. 2. Thisversion has been significantly revised. We would like to thank Stephen Cecchetti, Anthony Courakis, AndrewCrockett, Ettore Dorrucci, Mitsuhiro Fukao, Joseph Gagnon, Martin Hellwig, Peter Hördahl, Don Kohn, DavidLaidler, Axel Leijonhufvud, Bob McCauley, Pat McGuire, Gian Maria Milesi-Ferretti, Götz von Peter, LarrySchembri, Hyun Shin, Edwin Truman, Kazuo Ueda, Ignazio Visco and Fabrizio Zampolli for helpful commentsand discussions. We are also grateful to participants of the Tenth Asian Economic Policy Review Conferenceheld in Tokyo on 10 April 2010 for comments. Thomas Faeh, Swapan-Kumar Pradhan and Jhuvesh Sobrunprovided excellent research assistance. All remaining errors are ours. The views expressed are those of theauthors and do not necessarily represent those of the Bank for International Settlements or the Bank ofThailand.
Borio: Monetary and Economic Department, Bank for International Settlements, firstname.lastname@example.org;Disyatat: Monetary Policy Group, Bank of Thailand, email@example.com.