Global Liquidity Glut or Global Savings Glut? A Structural VAR Approach

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

[1]  Roland Straub,et al.  Fiscal Consolidation in the Euro Area: Long-Run Benefits and Short-Run Costs , 2008 .

[2]  Michał Rubaszek,et al.  On the Empirical Evidence of the Intertemporal Current Account Model for the Euro Area Countries , 2008, SSRN Electronic Journal.

[3]  Harald Uhlig,et al.  What are the Effects of Fiscal Policy Shocks? , 2002 .

[4]  Barry Jones,et al.  Does Money Matter in the IS Curve? The Case of the UK , 2008, SSRN Electronic Journal.

[5]  H. Uhlig.  What are the Effects of Monetary Policy on Output? : Results from an Agnostic Identification Procedure , 2005 .

[6]  Luca Onorante,et al.  The Usefulness of Infra-Annual Government Cash Budgetary Data for Fiscal Forecasting in the Euro Area , 2008 .

[7]  Livio Stracca,et al.  What is Global Excess Liquidity, and Does it Matter? , 2006, SSRN Electronic Journal.

[8]  G. Peersman,et al.  Putting the New Keynesian Model to a Test , 2006, SSRN Electronic Journal.

[9]  A. Fogli,et al.  The "Great Moderation" and the Us External Imbalance , 2006 .

[10]  Antonio Afonso,et al.  3-Step Analysis of Public Finances Sustainability: The Case of the European Union , 2008, SSRN Electronic Journal.

[11]  Ludger Schuknecht,et al.  Government Risk Premiums in the Bond Market: EMU and Canada , 2008 .

[12]  O. Tristani,et al.  Credit and the Natural Rate of Interest , 2008 .

[13]  Joseph Pearlman,et al.  Robust Monetary Rules under Unstructured and Structured Model Uncertainty , 2008 .

[14]  Laurent Maurin,et al.  The Role of Country-Specific Trade and Survey Data in Forecasting Euro Area Manufacturing Production: Perspective from Large Panel Factor Models , 2008 .

[15]  Lucio Sarno,et al.  Assessing the Benefits of International Portfolio Diversification in Bonds and Stocks , 2008, SSRN Electronic Journal.

[16]  Jiří Slačálek,et al.  Labor Supply after Transition: Evidence from the Czech Republic , 2008 .

[17]  F. Smets,et al.  U.S. Imbalances: The Role of Technology and Policy , 2007 .

[18]  Jon Faust,et al.  The Robustness of Identified VAR Conclusions About Money , 1998 .

[19]  Klaas P. Baks,et al.  Global Liquidity and Asset Prices: Measurement, Implications, and Spillovers , 1999, SSRN Electronic Journal.

[20]  Ricardo Mestre,et al.  An Area Wide Model (Awm) for the Euro Area , 2001, SSRN Electronic Journal.

[21]  Marcel Fratzscher,et al.  Asset Prices, Exchange Rates and the Current Account , 2009, SSRN Electronic Journal.

[22]  Michael Ehrmann,et al.  Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence , 2008, Social Science Research Network.

[23]  Marcus Hagedorn.  Nominal and Real Interest Rates During an Optimal Disinflation in New Keynesian Models , 2008 .

[24]  F. Smets,et al.  A Quantitative Perspective on Optimal Monetary Policy Cooperation between the US and the Euro Area , 2008, SSRN Electronic Journal.

[25]  A. Calza.  Globalisation, Domestic Inflation and Global Output Gaps: Evidence from the Euro Area , 2008 .

[26]  F. Canova,et al.  Monetary Policy Misspecification in VAR Models , 2000 .

[27]  Riccardo Cristadoro,et al.  Forecasting inflation and tracking monetary policy in the euro area: does national information help? , 2008 .

[28]  Roland Straub,et al.  Globalisation and the Euro Area: Simulation Based Analysis Using the New Area Wide Model , 2008 .

[29]  F. Canova,et al.  Monetary Disturbances Matter for Business Fluctuations in the G-7 , 2000 .

[30]  Global Versus Country-Specific Productivity Shocks and the Current Account , 1992 .

[31]  Daniel F. Waggoner,et al.  Markov-Switching Structural Vector Autoregressions: Theory and Application , 2005 .

[32]  Frank Smets,et al.  An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area , 2002 .

[33]  B. Bernanke.  The global saving glut and the U.S. current account deficit , 2005 .

[34]  H. Kempf,et al.  On Policy Interactions Among Nations: When Do Cooperation and Commitment Matter? , 2008 .

[35]  Matteo Barigozzi,et al.  A Robust Criterion for Determining the Number of Static Factors in Approximate Factor Models , 2008 .

[36]  M. Pesaran,et al.  Pension Reforms and Women Retirement Plans , 2008, The Journal of Human Resources.

[37]  Paul De Grauwe.  DSGE-Modelling: When Agents are Imperfectly Informed , 2008, SSRN Electronic Journal.

[38]  F. Smets,et al.  House Prices and the Stance of Monetary Policy , 2008 .

[39]  Simone Manganelli,et al.  The Impact of the Euro on Equity Markets: A Country and Sector Decomposition , 2008, SSRN Electronic Journal.

[40]  P. Clark,et al.  International Liquidity and the Role of the SDR in the International Monetary System , 2002, SSRN Electronic Journal.

[41]  Christophe Kamps,et al.  What are the Effects of Fiscal Policy Shocks? A VAR-based Comparative Analysis , 2008 .

[42]  Chris Kubelec,et al.  Global Imbalances and the Financial Crisis , 2009 .

[43]  Thomas Heckel,et al.  Sticky Wages: Evidence from Quarterly Microeconomic Data , 2008 .

[44]  L. Guerrieri,et al.  Expansionary Fiscal Shocks and the Trade Deficit , 2005 .

[45]  Ricardo J. Caballero,et al.  On the Macroeconomics of Asset Shortages , 2006 .

[46]  J. Bikker,et al.  Impact of bank competition on the interest rate pass-through in the euro area , 2008, SSRN Electronic Journal.

[47]  A. Lowenfeld.  The international monetary system , 1977 .

[48]  Gianni Amisano,et al.  Imperfect Predictability and Mutual Fund Dynamics: How Managers Use Predictors in Changing Systematic Risk , 2008, SSRN Electronic Journal.

[49]  A. Sentance,et al.  The global credit boom: Challenges for macroeconomics and policy , 2009 .

[50]  Christian Ewerhart,et al.  Repo Markets, Counterparty Risk, and the 2007/2008 Liquidity Crisis , 2008 .

[51]  A. Lipińska,et al.  The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries , 2008 .

[52]  Martin Scheicher,et al.  How has CDO Market Pricing Changed During the Turmoil? Evidence from CDS Index Tranches , 2008 .