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Unformatted text preview: Global Imbalances and the Financial Crisis: Products of Common Causes Maurice Obstfeld University of California, Berkeley and Kenneth Rogoff Harvard University Federal Reserve Bank of San Francisco Asia Economic Policy Conference October 18-20, 2009 Embargoed until October 19, 10:50 a.m. Pacific, or upon delivery. Global Imbalances and the Financial Crisis: Products of Common Causes Maurice Obstfeld and Kenneth Rogoff * October 2009 (Second Conference Draft) *University of California, Berkeley, and Harvard University. Paper prepared for the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, Santa Barbara, CA, October 18-20, 2009. We thank Alexandra Altman and Matteo Maggiori for outstanding research assistance. Financial support was provided by the Coleman Fung Risk Management Center at UC Berkeley. 1 In my view it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. --Ben S. Bernanke 1 Introduction Until the outbreak of financial crisis in August 2007, the mid-2000s was a period of strong economic performance throughout the world. Economic growth was generally robust; inflation generally low; international trade and especially financial flows expanded; and the emerging and developing world experienced widespread progress and a notable absence of crises. This apparently favorable equilibrium was underpinned, however, by three trends that appeared increasingly unsustainable as time went by. First, real estate values were rising at a high rate in many countries, including the worlds largest economy, the United States. Second, a number of countries were simultaneously running high and rising current account deficits, including the worlds largest economy, the United States. Third, leverage had built up to extraordinary levels in many sectors across the globe, notably among consumers in the United States and Britain and financial entities in many countries. Indeed, we ourselves began pointing to the potential risks of the global imbalances in a series of papers beginning in 2001. 2 As we will argue, the global imbalances did not cause the leverage and housing bubbles, but they were a critically important codeterminant. In addition to being the worlds largest economy, the United States had the worlds highest rate of private homeownership and the worlds deepest, most dynamic 1 Bernanke (2009). 2 See Obstfeld and Rogoff (2001, 2005, 2007). 2 financial markets. And those markets, having been progressively deregulated since the 1970s, were confronted by a particularly fragmented and ineffective system of government prudential oversight. This mix of ingredients, as we now know, was deadly....
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This note was uploaded on 12/26/2011 for the course ECON 280B taught by Professor Bohn during the Fall '09 term at UCSB.

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PDF2 - Global Imbalances and the Financial Crisis: Products...

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