TAILIEUCHUNG - Global imbalances and the financial crisis: Link or no link?

Some previous studies have looked at whether the structure of the mortgage market plays a role in the propagation of monetary policy shocks. Calza et al (2009) and Assenmacher-Wesche and Gerlach (2010) nd that higher mortgage market development ampli es the effects of monetary policy shocks on housing variables. Both studies estimate panel VARs across two groups of countries, classi ed according to their degree of mortgage market development using various cross-sectional indicators. Our approach is similar to theirs but differs in three important ways. First, we identify the effect of capital in ows shocks in addition to monetary policy shocks. Second, we use sign restrictions rather than zero restrictions. | BANK FOR INTERNATIONAL SETTLEMENTS BIS Working Papers No 346 Global imbalances and the financial crisis Link or no link by Claudio Borio and Piti Disyatat Monetary and Economic Department May 2011 JEL classification E40 E43 E44 E50 E52 F30 F40. Keywords Global imbalances saving glut money credit capital flows current account interest rates financial crisis. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements and from time to time by other economists and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from Bank for International Settlements Communications CH-4002 Basel Switzerland E-mail publications@ Fax 41 61 280 9100 and 41 61 280 8100 This publication is available on the BIS website . Bank for International Settlements 2011. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 print ISBN 1682-7678 online Global imbalances and the financial crisis Link or no link 1 Claudio Borio and Piti Disyatat2 Abstract Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis by putting significant downward pressure on world interest rates and or by simply financing the booms in those countries the excess saving view . We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems i drawing inferences about a country s cross-border financing activity .

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