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Bernanke“The Global Savings Glut and the U.S. Current Account Deficit” (2005)

Vaughan / Economics 639

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Research Question

• Why was the U.S. current account deficit so large?– Related question: Why was U.S. savings rate so

low?

Note:– Current Account = Exports - Imports– U.S. Net Foreign Borrowing = U.S. Current Account Deficit

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World Savings Glut Story

• Developing world moved from net user to net supplier of funds in international capital markets in the late 1990s/early 2000s, largely in response to financial crises.

• Savings flowed into the U.S., to take advantage of innovation/rising productivity (also because of sophistication of U.S. financial markets and special role of dollar as a reserve currency), which fueled an increase in equity prices (1996-2000).

• After stock market correction (post 2000), inflow of savings pushed down real interest rates, which led to an increase in housing demand (rise in home prices).

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World Savings Glut Story

• ↑ Demand for U.S. financial assets → ↑ Price of the Dollar

• ↑ Price of Dollar → ↑ Imports, ↓ Exports [Current Account Deficit ↑ ]

• ↑ U.S. Household Wealth (higher stock/house prices) → ↑ Consumption, ↓ Saving (also fueled import demand

and contributed to current account deficit)

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Ingredients in Housing Bubble

• Roberts: Households wanted to gamble with other people’s money.

• Kling: Basle made mortgage-related securities attractive.

• Taylor: Fed kept U.S. interest rates artificially low.

• Bernanke: World savings glut pushed interest rates to record low levels in U.S.

This time is different?

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Reinhart & Rogoff: Predictors of Financial CrisesSurge in Capital Inflows

• Note that U.S. current account (capital inflow) was significantly larger.