Global imbalances
JOURNAL OF ECONOMIC ISSUES
Vol. XLV I
No. 2
June 2012
ISSN 0021−3624/2012 $9.50 + 0.00
DOI 10.2753/JEI0021-3624460210
Global Imbalances and Financial Crisis:
Financial Globalization as a Common Cause
Yan Liang
Abstract: Global imbalances and global financial instability are tightly connected and can be traced to a common cause, that is, financial globalization within the current monetary and financial system. The paper argues that financial globalization contributes to global imbalances by impeding real exchange adjustments, inducing export-led growth, and sustaining widening deficits in the financial core country. Meanwhile, financial globalization leads to increasing global financial instability. Without a true international clearing union, the United States is charged with providing global liquidity and managing financial risks; but the failure of the United States to provide these essential banking services ultimately brought about the 2008 global financial crisis.
Keywords: financial crisis, financial globalization, global imbalances
JEL Classification Codes: F32, F33, O19
Global imbalances are heralded by the mainstream as an explanation for the cause of the 2008 global financial crisis. The argument largely concentrates on the impacts of excess savings produced by the balance of payment (BOP) surplus countries on financial developments in the BOP deficit countries. Specifically, it is propounded that emerging countries, especially China and other emerging Asians, have been pursuing export-led growth and investing their BOP surpluses in financial assets in the deficit countries, the United States being the predominant destination. The socalled global imbalances directly led to falling long term real interest rates and inflated asset prices, which eventually came to a stall and ushered in one of the worst global crises and economic recessions.
The global imbalances-causing-financial-crisis view, or, as Bernanke calls it, the
Vol. XLV I
No. 2
June 2012
ISSN 0021−3624/2012 $9.50 + 0.00
DOI 10.2753/JEI0021-3624460210
Global Imbalances and Financial Crisis:
Financial Globalization as a Common Cause
Yan Liang
Abstract: Global imbalances and global financial instability are tightly connected and can be traced to a common cause, that is, financial globalization within the current monetary and financial system. The paper argues that financial globalization contributes to global imbalances by impeding real exchange adjustments, inducing export-led growth, and sustaining widening deficits in the financial core country. Meanwhile, financial globalization leads to increasing global financial instability. Without a true international clearing union, the United States is charged with providing global liquidity and managing financial risks; but the failure of the United States to provide these essential banking services ultimately brought about the 2008 global financial crisis.
Keywords: financial crisis, financial globalization, global imbalances
JEL Classification Codes: F32, F33, O19
Global imbalances are heralded by the mainstream as an explanation for the cause of the 2008 global financial crisis. The argument largely concentrates on the impacts of excess savings produced by the balance of payment (BOP) surplus countries on financial developments in the BOP deficit countries. Specifically, it is propounded that emerging countries, especially China and other emerging Asians, have been pursuing export-led growth and investing their BOP surpluses in financial assets in the deficit countries, the United States being the predominant destination. The socalled global imbalances directly led to falling long term real interest rates and inflated asset prices, which eventually came to a stall and ushered in one of the worst global crises and economic recessions.
The global imbalances-causing-financial-crisis view, or, as Bernanke calls it, the
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