Working Paper: NBER ID: w19635
Authors: Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti
Abstract: We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
Keywords: Global Imbalances; Saving Glut; Banking Glut; House Prices; Household Debt
JEL Codes: E20; E21; E44; F32; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign capital inflows (F21) | Downward pressure on U.S. interest rates (E43) |
| Downward pressure on U.S. interest rates (E43) | Stimulate demand for housing (R21) |
| Stimulate demand for housing (R21) | Increase household debt (G51) |
| Lower interest rates (E43) | Greater consumption and investment (E20) |
| Increased borrowing and consumption (F65) | Upward pressure on house prices (R21) |
| Upward pressure on house prices (R21) | Relaxation of collateral constraints for borrowers (G21) |
| Banking glut (G21) | Compression of spreads between borrowing and lending rates (E43) |
| Compression of spreads between borrowing and lending rates (E43) | Enhanced credit conditions in the U.S. economy (F34) |
| Global saving glut (E21) | Increase in U.S. house prices (R31) |
| Global saving glut (E21) | Increase in household debt (G51) |