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Global liquidity glut or global savings glut? A structural VAR approach

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  • Fidora, Michael
  • Bracke, Thierry

Abstract

Since the late-1990s, the global economy is characterised by historically low risk premia and an unprecedented widening of external imbalances. This paper explores to what extent these two global trends can be understood as a reaction to three structural shocks in different regions of the global economy: (i) monetary shocks ("excess liquidity" hypothesis), (ii) preference shocks ("savings glut" hypothesis), and (iii) investment shocks ("investment drought" hypothesis). In order to uniquely identify these shocks in an integrated framework, we estimate structural VARs for the two main regions with widening imbalances, the United States and emerging Asia, using sign restrictions that are compatible with standard New Keynesian and Real Business Cycle models. Our results show that monetary shocks potentially explain the largest part of the variation in imbalances and financial market prices. We find that savings shocks and investment shocks explain less of the variation. Hence, a "liquidity glut" may have been a more important driver of real and financial imbalances in the US and emerging Asia than a "savings glut". JEL Classification: E2, F32, F41, G15

Suggested Citation

  • Fidora, Michael & Bracke, Thierry, 2008. "Global liquidity glut or global savings glut? A structural VAR approach," Working Paper Series 911, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2008911
    Note: 491968
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    References listed on IDEAS

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    Cited by:

    1. Jan Frait & Luboš Komárek & Zlatuše Komárková, 2011. "Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 5-33, January.
    2. Tillmann, Peter, 2013. "Capital inflows and asset prices: Evidence from emerging Asia," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 717-729.
    3. Evrim Imer-Ertunga, 2011. "Global financing conditions and sovereign debt yields of emerging market countries," Applied Financial Economics, Taylor & Francis Journals, vol. 21(4), pages 207-215.
    4. Jean-Baptiste Gossé & Cyriac Guillaumin, 2011. "The impact of external shocks on the eurozone: a structural VAR model," Working Papers hal-00610024, HAL.
    5. Giancarlo Bertocco, 2014. "Global Saving Glut and Housing Bubble: A Critical Analysis," Economia politica, Società editrice il Mulino, issue 2, pages 195-218.
    6. Jean-Baptiste Gossé & Cyriac Guillaumin, 2010. "L'impact des chocs externes sur et dans la zone euro : un modèle VAR structurel," Working Papers hal-00493384, HAL.
    7. Sa, Filipa & Wieladek, Tomasz, 2010. "Monetary policy, capital inflows and the housing boom," Bank of England working papers 405, Bank of England.
    8. Bettendorf, Timo, 2017. "Investigating Global Imbalances: Empirical evidence from a GVAR approach," Economic Modelling, Elsevier, vol. 64(C), pages 201-210.
    9. Yao Axel Ehouman, 2020. "Do oil-market shocks drive global liquidity?," EconomiX Working Papers 2020-33, University of Paris Nanterre, EconomiX.
    10. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Isaac Mwangi, 2013. "Commodity price shocks and inflation in a net oil-importing economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(2), pages 125-148, June.
    11. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: Challenges for macroeconomics and policy," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1426-1461, December.
    12. Ms. L. Effie Psalida & Tao Sun, 2011. "Does G-4 Liquidity Spill Over?," IMF Working Papers 2011/237, International Monetary Fund.
    13. Goknur Umutlu & Yilmaz Yildız, 2011. "The Effect of Global Liquidity on Macroeconomic Parameters," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(3), pages 167181-1671, September.
    14. Nady Rapelanoro, 2017. "Hoarding international reserves and global liquidity expansion, what are the links and do they matter?," EconomiX Working Papers 2017-13, University of Paris Nanterre, EconomiX.
    15. repec:hal:cepnwp:hal-00610024 is not listed on IDEAS
    16. Astley, Mark & Giese, Julia & Hume, Michael & Kubelec, Chris, 2009. "Global imbalances and the financial crisis," Bank of England Quarterly Bulletin, Bank of England, vol. 49(3), pages 178-190.
    17. Sigríður Benediktsdóttir & Gauti B. Eggertsson & Eggert Þórarinsson, 2017. "The Rise, the Fall, and the Resurrection of Iceland," NBER Working Papers 24005, National Bureau of Economic Research, Inc.
    18. Yu-Wei Hu, 2010. "Management of China's foreign exchange reserves: a case study on the state administration of foreign," European Economy - Economic Papers 2008 - 2015 421, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    19. Sigríður Benediktsdóttir & Gauti Bergþóruson Eggertsson & Eggert Þórarinsson, 2017. "The Rise, Fall, and Resurrection of Iceland: A Postmortem Analysis of the 2008 Financial Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 191-308.
    20. Nady Rapelanoro, 2016. "Spillover effects of global liquiditys expansion on emerging countries: evidences from a Panel VAR approach," EconomiX Working Papers 2016-17, University of Paris Nanterre, EconomiX.

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    More about this item

    Keywords

    current account; global imbalances; global liquidity; investment drought; savings glut; structural VARs.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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