Explaining the Financial and Economic Crises
- New Directions in Modern Economics series
Edited by Eckhard Hein, Daniel Detzer and Nina Dodig
Chapter 7: Global and European imbalances and the crisis: a critical review
The wave of global imbalances generated since the turn of the twenty-first century between the US economy and those of the South-East Asian emerging economies and oil-exporting countries were identified early on as a fundamental cause of the global financial crisis. The argument linking the crisis to these imbalances, in broad strokes, was that current account surpluses generated by emerging economies were placed in US financial assets. These flows, in the form of asset demand, pushed down long-term interest rates, which encouraged a credit boom that fuelled a real estate market bubble. In other words, the US financial system came under strong pressure to receive and recycle capital flows from abroad. Until the outbreak of the crisis, global imbalances were perceived, at least by some researchers, as a signal of a new global equilibrium that might persist over time. However, another group of researchers argued that these imbalances should be corrected by appropriate fiscal and monetary policies in the USA and by exchange rate adjustments in China to avoid a radical adjustment induced by a sudden stop of foreign capital flows into the US economy, an event with a high probability of dragging the global economy into crisis.
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