Working Paper: CEPR ID: DP7606
Authors: Maurice Obstfeld; Kenneth Rogoff
Abstract: This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed?s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States? ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble.
Keywords: current account deficit; financial crisis; financial reform; global imbalances; housing bubble
JEL Codes: E44; E58; F32; F33; F42; G01; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. monetary policy (E52) | housing bubble (R31) |
| global real interest rates (E43) | credit market conditions (E44) |
| U.S. monetary policy + global real interest rates (E43) | credit market distortions (E44) |
| China's exchange rate policies (F31) | U.S. ability to borrow cheaply (F34) |
| U.S. ability to borrow cheaply (F34) | housing bubble (R31) |
| global imbalances (F65) | financial crisis (G01) |
| foreign borrowing (F34) | postponement of necessary policy adjustments (E61) |
| global imbalances (F65) | underlying economic weaknesses (P19) |