NBER WORKING PAPER SERIES THE EFFECTS OF THE SAVING AND BANKING GLUT ON THE U.S. ECONOMY

We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period. Alejandro Justiniano Economic Research Department Federal Reserve Bank of Chicago 230 S. LaSalle Street Chicago, IL 60604 ajustiniano@frbchi.org Giorgio Primiceri Department of Economics Northwestern University 318 Andersen Hall 2001 Sheridan Road Evanston, IL 60208-2600 and NBER g-primiceri@northwestern.edu Andrea Tambalotti Research and Statistics Group Federal Reserve Bank of New York 33 Liberty Street, 3rd Floor New York, NY 10045 a.tambalotti@gmail.com THE EFFECTS OF THE SAVING AND BANKING GLUT ON THE U.S. ECONOMY ALEJANDRO JUSTINIANO, GIORGIO E. PRIMICERI, AND ANDREA TAMBALOTTI Abstract. We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period. We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.

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