External Imbalances and Financial Crises / Alan M. Taylor.

Format:

Book

Author/Creator:

Taylor, Alan M.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18606.

NBER working paper series no. w18606

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself.

Notes:

Print version record

December 2012.