Working Paper: NBER ID: w13978
Authors: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
Abstract: We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis.
Keywords: subprime; Bretton Woods II; liquidity crisis; balance of payments crisis
JEL Codes: F02; F32; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bretton Woods II system (F33) | subprime liquidity crisis (F65) |
| subprime liquidity crisis (F65) | balance of payments crisis for the United States (F32) |
| subprime liquidity crisis (F65) | capital flows and interest rates (F32) |
| capital flows and interest rates (F32) | economic activity (E20) |
| Bretton Woods II system (F33) | economic stability of the U.S. (N12) |