Savings Glut Research Articles

GCC PETRODOLLAR SURPLUSES AND THE US CURRENT ACCOUNT IMBALANCE

Given the secrecy that wraps the flows of the GCC countries’ petrodollar surpluses to the United States and the pressures on these countries to spend and recycle more, this study attempts to uncover the direct and reverse causal relationships between the GCC financial accounts and the US current account deficit. It examines whether the GCC petrodollar surpluses are part of the global savings glut (an external factor) that causes the US current account deficit, or on the contrary this deficit is home-grown and the petrodollar savings glut hypothesis does not hold. It particularly focuses on the world’s important oil exporters to find out if the homegrown deficit hypothesis holds for the world’s largest oil consumer. The implications and policy recommendations for this significant source of global external imbalances are provided

Global Liquidity Glut or Global Savings Glut? A Structural VAR Approach

Since the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy: (i) monetary shocks (excess hypothesis), (ii) preference shocks (savings glut hypothesis), and (iii) investment shocks (investment drought hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that shocks and investment shocks explain less of the variation. Hence, a liquidity glut may have been a more important driver of real and financial imbalances in the US and emerging Asia than a savings glut.

The Credit Crunch of 2007-2008: A Discussion of the Background, Market Reactions, and Policy Responses

This article discusses the events surrounding the 2007-08 credit crunch. It highlights the period of exceptional macrostability, the global savings glut, and financial innovation in mortgage-backed securities as the precursors to the crisis. 

Fear and Market Failure: Global Imbalances and “Self-Insurance”

Two key issues are examined in an integrated framework: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss Aversion in Emerging Markets, their precautionary savings can generate substantial ‘global imbalances’, especially if there is an inefficient supply of global ‘insurance’. A combination of fear and market failure generates imbalances as a general equilibrium outcome. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level: but disequilibrium may result if the required real interest rate is negative. A precautionary savings glut appears to us to be a temporary phenomenon, however, destined for correction as and when adequate reserve levels are achieved. If the process of correction is triggered by ‘Sudden Stop’ on capital flows to the US, might this not lead to 'hard landing' that is forecast by several leading macroeconomists? When precautionary saving is combined with financial panic, history offers no guarantee of full employment.

Global Imbalances and Low Interest Rates: An Equilibrium Model vs. A Disequilibrium Reality

The most obvious explanation for the large and widening US current account deficit is the high budget deficit and low national saving. But a variety of clever economists have come up with 8 other, more sanguine, explanations: (1) the siblings are not twins, (2) investment boom, (3) low US private savings, (4) global savings glut, (5) It's a big world, (6) valuation effects will pay for it, (7) Intermediation rents . . . pay for the trade deficits, and (8) China's development strategy entails accumulating unlimited dollars. The impressive paper by Caballero, Farhis, and Gourinchas falls under category (7). Their theoretical model is innovative and interesting, and has the virtue of being able to explain the current account deficit together with the anomalously low long-term interest rates during 2001-2005. The basic idea is that fast growth in emerging markets coupled with their inability to generate local store of value instruments increases their demand for saving instruments from the developed countries. More growth potential in the United States than in Europe means that a larger share of global saving flows to US assets. Ultimately, however, I am not sure that it is the correct explanation, or a reason to consider the deficits sustainable, any more than the others. Their hypothesized collapse in the desirability of emerging market assets and stagnant growth in Europe and Japan fit the 1990s fairly well. But they don't fit 2003-2006 as well, which is the puzzle period, that is, the period that featured the record US current account deficits coinciding with low long-term interest rates. Emerging markets have had a high capacity during 2003-06 to generate assets that others want. More persuasive is the hypothesis that the US continues to exploit the exorbitant privilege under which others accumulate dollars as reserves, but that this exclusive position of the dollar will not necessarily continue forever.

The US Long-Term Interest Rate Conundrum

US long-term interest rates evolved between 4 and 4.5% from the third quarter of 2004 to the third quarter of 2005. In the same time, the Federal Reserve raised its short-term rate. The last one was increased from 1% in June 2004 to 4.75% in March 2006. The long rate has thus been considered too low. In this essay, we will primarily try to assess the monetary policy effects on the US long-term interest rate. We will do some dynamic forecasts in order to gauge if the long rate sluggishness is in line with future short-term rate and inflation rate expectations. Indeed, simulations show that the long rate would be about 70 basis points below our forecasts. To explain this conundrum, we will explore two hypotheses that have been advocated: a Global Saving Glut and a rise in Pension Funds and Foreigners' long-term asset purchases. The latter hypothesis makes it possible to elucidate a great part of the gap between the long rate and the forecasts.

Could the twin deficits jeopardize US hegemony?

The American twin deficits are back. One obvious cost is a possible hard landing. A less obvious possibility is that imperial overstretch could eventually cost the US its global hegemony. This paper addresses many challenges to the twin deficits view that have been offered: the Starve the Beast rationale for the budget deficit, the straw-man question of whether the budget and current account deficits are always twins, the wishful thinking that the US has an investment boom, the correct point that private saving is low as well as public saving, the claim of a global savings glut, the observation that global financial markets are big, the hope that valuation effects or unmeasured services as world banker will allow Americans to continue the exorbitant privilege of consuming at others’ expense indefinitely, and the proposition that China will happily buy dollars indefinitely. When all novel viewpoints are considered, one is still left with the reality of an unsustainable path of high budget deficits, low national saving, and high current account deficits.

Capital Flows, Interest Rates and Precautionary Behaviour: A Model of Global Imbalances

A dynamic stochastic model of global equilibrium, where countries outside the U.S. face higher risk than the U.S. itself, predicts current account surpluses in the RoW and U.S. deficits. With Loss Aversion, such precautionary savings can cause substantial 'global imbalances', particularly if there is an inefficient supply of global 'insurance'. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level (though the required real interest may be negative). Low interest rates and high savings outside the U.S. appear to be an efficient global equilibrium: but is this sustainable? A precautionary savings glut appears to us to be a temporary phenomenon, destined for correction as and when adequate reserve levels are achieved. But if the process of correction is triggered by 'Sudden Stop' on capital flows to the U.S., might it not lead to the inefficient outcomes forecast by several leading macroeconomists? When precautionary saving is combines with financial panic, history offers no guarantee of full employment.

Is there a global bonds bubble ‐ what if it bursts?

Both real and nominal bond yields have fallen to historically low levels, and in the US the yield curve has been inverted (that is, two‐year yields have been above ten‐year yields) or very flat since the start of December. This article by Jonathan Hoffman and Keith Church discusses the possible reasons for these developments ‐ including the 'savings glut' proposed by the new Fed Chairman Bernanke ‐ as well as the likelihood of a sharp sell‐off of bonds. It then looks at precedents for a sell‐off but concludes that there are few parallels between the current situation and the earlier episodes. Finally, it identifies possible triggers for a sell‐off and presents a simulation with the OEF Global Model to analyse the likely consequences for the world economy. The conclusion is that, while a rise in US yields to 6.5% in the first half of 2007 would cut growth significantly, including through a fall of almost 1% point in the growth rate of household consumption in the US in 2008, its impact would not be catastrophic.

Asia’s Current Account Surplus: Savings Glut or Investment Drought?

Over the last few years economists have started referring to the existence of “global payments imbalances”, reflected in the growing current account surpluses and deficits among different regions of the world (surpluses mostly, but not only, by a number of Asian countries; deficits mainly by the US), together with a substantial accumulation of international reserves (also by a number of Asian countries). This paper examines Asia’s current account surplus from the perspective of the savings−investment gap in order to determine whether the surplus is a result of an increase in savings rates (i.e., a savings glut) or a decline in investment rates (i.e., an investment drought). The analysis indicates that Asian current account surpluses are mostly associated with significant investment declines after the Asian financial crisis. Using data from 1986 to 2003 for a group of Southeast Asian countries, we find that the decrease and stagnation of domestic credit, the creation of excess capacity, and the relative decline of profit rates have contributed to the fall of investment rates across Asia, indicating a return to export-led growth.

Do Open Borders Produce Greater Happiness? An Underanalyzed Question

When Carol Graham and Susan Collins asked me to do this, I was a little reluctant since I am not an expert on global labor markets. However, I have recently been exposed to some interesting work that is going on right here at Brookings. This work has stimulated me to suggest a relatively loose mega hypothesis for which I think there are at least some pieces of supportive evidence. However, I present these ideas to provoke discussion rather than to argue the case in any dispositive way. I come at this from what you might call a rich-country perspective, and more specifically from a U.S. perspective. It seems to me that there is good news and bad news from this perspective. The good news is that the United States has more flexible and open labor markets than do some other rich countries, such as those in Europe. That is commonly thought to be one reason why we have a lower rate of unemployment, less inflation, and more growth. Our strong econ omy in turn has attracted capital and labor from the rest of the world. Some people argue this is because a glut of savings and of labor exists in the rest of the world and that these flows of capital and labor to the United States are a result of the fact that this country is a very attractive place to work or invest. So that is the good news. The bad news with respect to this inflow of capital is the fact that we have become extremely dependent on foreigners to pay for the excess of imports over exports; we are consuming more than we are producing and borrowing the dif ference. It is ironic, if not immoral, that the wealthiest country in the world is borrowing from poorer countries such as China to support its excess consump tion. More than half of our publicly marketable debt is now owed to foreigners, many of them in less-developed nations. If such capital were invested instead 245

Current Account Balances, Financial Development and Institutions: Assaying the World 'Savings Glut'

We investigate the medium-term determinants of the current account using a model that controls for factors related to institutional development, with a goal of informing the recent debate over the existence and relevance of the savings glut. The economic environmental factors that we consider are the degree of financial openness and the extent of legal development. We find that for industrial countries, the government budget balance is an important determinant of the current account balance; the budget balance coefficient is 0.21 in a specification controlling for institutional variables. More interestingly, our empirical findings are not consistent with the argument that the more developed financial markets are, the less a country undertakes. We find that this posited relationship is applicable only for countries with highly developed legal systems and open financial markets. For less developed countries and emerging market countries we usually find the reverse correlation; greater financial development leads to higher savings. Furthermore, there is no evidence of excess domestic saving in the Asian emerging market countries; rather they seem to have suffered from depressed investment in the wake of the 1997 financial crises. We also find evidence that the more developed equity markets are, the more likely countries are to run current account deficits.