Monday, January 24, 2011

Did Global Imbalances Cause the Global Financial Crisis?

Global imbalances -- the coexistence of large deficits and surpluses in the global economy, such as too much spending by U.S. consumers and too little by Chinese consumers -- were not a major cause of the global crisis, according to a new working paper by Luis Serven and Ha Nguyen. In fact, how international capital flowed before and during the crisis suggests global imbalances are the result of structural distortions in global financial markets and major individual economies, which have led to a steady rise in demand for U.S. assets from the rest of the world. Without changes in those structural and policy choices, global imbalances could persist. This contradicts the conventional view that global imbalances are caused by unsustainable, high demand for goods in the U.S. and other rich countries and that a correction must involve major U.S. trade adjustment and depreciation of the dollar. The paper also evaluates the future of global imbalances, especially their impact on developing countries.

Full paper here . The paper argues that global imbalances were not among the main causes of the financial crisis.