Savings and Liquidity Gluts and the American Long-Term Interest Rates Before the Great Financial Crisis
DOI:
https://doi.org/10.15678/ZP.2019.50.4.06Keywords:
Great Financial Crisis, savings glut, banking glut, liquidity glut, global liquidityAbstract
Objectives: This article examines the impact of the global savings glut on the long-term interest rates in the United States before the Great Financial Crisis. It presents the impact mechanics of global savings on interest rates, discusses arguments supporting and contradicting the significance of this phenomenon, presents an alternative concept, namely global liquidity glut, and estimates the significance of both phenomena in shaping long-term interest rates in the USA before the crisis.
Research Design & Methods: First, the impact of purchases of the US treasury bonds made by foreign investors on long-term interest rates is being assessed. Second, metrics representing global savings and liquidity gluts are being used to explain those purchases. Finally, a counterfactual exercise is used to reveal the impact that each of those factors had on the American ten-year treasury yields.
Findings: The statistical analysis of both effects shows that foreign purchases of the Treasuries lowered the US longterm interest rates by up to 140 bps, with excess global savings depressing them by approximately 45 bps, and excess liquidity by another 75 bps.
Implications / Recommendations: Monetary policy, as well as savings rates, might have wider than only local consequences. Excess liquidity and savings in one country can impact interest rates in other areas.
Contribution / Value Added: This article presents an alternative and neglected in literature explanation for the phenomena of low long-term interest rates before the Great Financial Crisis in the USA, namely global liquidity glut that depressed interest rates more powerfully than excessive global savings, contributing to the development of the investment bubble on the housing market and, thus, the Great Financial Crisis.
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References
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Borio, C., & Disyatat, P. (2011). Global imbalances and the financial crisis: Link or no link? BIS Working Papers, 346.
Bracke, T., & Fidora, M. (2008). Global liquidity glut or global savings glut? A structural VAR approach. ECB Working Paper, 911.
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Corsetti, G., & Müller, G. (2006). Twin deficits: Squaring theory, evidence and common sense. Economic Policy, 21, 597–638.
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Ma, G., & Yi, W. (2010). China’s high saving rate: Myth and reality. International Economics, 122, 5–39.
Modigliani, F., & Cao, S. L. (2004). The Chinese saving puzzle and the life-cycle hypothesis. Journal of Economic Literature, 42(1), 145–170.
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Punzi, M.T., & Kauko, K. (2015). Testing the global banking glut hypothesis. Journal of Financial Stability, 19, 128–151.
Reiseman, G. (2009). Credit expansion, crisis, and the myth of the saving glut. https://mises.org/library/credit-expansion-crisis-and-myth-saving-glut, accessed on 26.05.2020.
Roach, S. (2009). The Shirting Mix of Global Savings. New York: Global Economic Forum.
Shin, H.S. (2012). Global banking glut and loan risk premium. IMF Economic Review, 60(2), 155–192.
Steinberg, J. (2019). On the source of U.S. trade deficits: Global saving glut or domestic saving drought? Review of Economic Dynamics, 31, 200–223.
Taylor, J.B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong. NBER Working Paper, 14631.
IMF (2004). The U.S. current account deficit and the global economy. https://www.imf.org/en/Publications/Other-Periodicals/Issues/2016/12/31/The-U-S-17872, accessed on 26.05.2020.
Turkay, M. (2018). Does international liquidity matter for G-7 countries? A PVAR approach. International Econometric Review, 10.
Warnock, F.E., & Warnock, V.C. (2006). International capital flows and U.S. interest rates. Journal of International Money and Finance, 28(6).
Wu, T. (2005). The long-term interest rate conundrum: Not unraveled yet? https://www.frbsf.org/economic-research/publications/economic-letter/2005/april/the-long-term-interest-rate-conundrum-notunraveled-yet/, accessed on 26.05.2020.
Zandi, M. (2008). Financial Shock: A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis. New York: FT Press.
Arora, V., Tyers, R., & Zhang, Y. (2014). Reconstructing the savings glut: The global implications of Asian excess saving. International Journal of Economics and Finance, 7(7).
Backus, D.K., & Wright, J.H. (2007). Cracking the conundrum. NBER Working Paper, 13419.
Baks, C., & Kramer, C. (1999). Global liquidity and asset prices: Measurement, implications, and spillovers. IMF Working Paper, 99(168).
Batson, A. (2009). Asian officials reject focus on savings glut. Wall Street Journal, July 6.
Becker, S. (2007). Global liquidity glut and asset price inflation. Fact or fiction? Deutsche Bank Research, May 29.
Belke, A., & Gros, D. (2010). Global liquidity, world savings glut and global policy coordination. Discussion Papers of DIW, 973.
Bems, R., Dedola, L., & Smets, F. (2007). US imbalances: The role of technology and policy. Journal of International Money and Finance, 26(4), 523–545.
Bernanke, B. (2005). The global saving glut and the U.S. current account deficit. EconPapers, 77.
Bernanke, B.S. (2002). Deflation: Making sure ‘it’ doesn’t happen here. BIS Review, 68.
Bertaut, C., DeMarco, L.P., Kamin, S.B., & Tryon, R.W. (2011). ABS inflows to the United States and the global financial crisis. NBER Working Paper, 17350.
Borio, C., & Disyatat, P. (2011). Global imbalances and the financial crisis: Link or no link? BIS Working Papers, 346.
Bracke, T., & Fidora, M. (2008). Global liquidity glut or global savings glut? A structural VAR approach. ECB Working Paper, 911.
Chandrasekhar, C.P., & Ghosh, J. (2005). The myth of a global savings glut. http://www.macroscan.org/anl/sep05/anl300905Global_Savings.htm, accessed on 26.05.2020.
Chinn, M.D., & Ito, H. (2007). Current account balances, financial development and institutions: Assaying the world “saving glut”. Journal of International Money and Finance, 26(4), 546–569.
Clarida, R.H. (2005). Japan, China, and the U.S. current account deficit. China File, March 1.
Corsetti, G., & Müller, G. (2006). Twin deficits: Squaring theory, evidence and common sense. Economic Policy, 21, 597–638.
Darius, R., & Radde, S. (2010). Can global liquidity forecast asset prices? IMF Working Paper, 10(196).
Domeij, D., & Flodén, M. (2006). Population aging and international capital flows. International Economic Review, 47(3), 1013–1032.
Dooley, M.P., Folkerts-Landau, D., & Garber, P.M. (2005). Savings gluts and interest rates: The missing link to Europe. NBER Working Paper, 11520.
Dooley, M.P., Folkerts-Landau, D., & Garber, P.M. (2009). Bretton Woods II still defines the international monetary system. NBER Working Paper, 14731.
Erceg, C.J., Guerrieri, L., & Gust, C. (2005). Expansionary fiscal shocks and the US trade deficit. International Finance, 8(3), 363–397.
Felipe, J., & Kintanar, K. (2006). Asia’s current account surplus: Savings glut or investment drought? Asian Development Review, 23.
Fels, J. (2005). Is Global Excess Liquidity Drying Up? London: Morgan Stanley Economic Forum.
Ferguson, R.W. Jr. (2005). U.S. Current Account Deficit: Causes and Consequences. https://www.federalreserve.gov/boarddocs/speeches/2005/20050420/default.htm, accessed on 26.05.2020.
Fratzscher, M., Duca, M., & Straub, R. (2013). On the international spillovers of US quantitative easing. ECB Working Papers, 1557.
Gilchrist, S., Yue, V.Z., & Zakrajšek, E. (2016). The response of sovereign bond yields to U.S. monetary policy. http://people.bu.edu/sgilchri/research/GYZ_CBChile_April22.pdf, accessed on 26.05.2020.
Greenspan, A. (2010). Financial Crisis Inquiry Commission. New York: Cosimo Reports.
Hall, R.E. (2017). Low interest rates: Causes and consequences. International Journal of Central Banking, 13, 103–117.
Hoffmann, M., & Stewen, I. (2016). Holes in the Dike: The global savings glut, U.S. house prices and the long shadow of banking deregulation. CESifo Working Paper Series, 5332.
Hubbard, R.G. (2006). The U.S. current account deficit and public policy. Journal of Policy Modeling, 28(6), 665–671.
Hunt, B., & Rebucci, A. (2005). The US dollar and the trade deficit: What accounts for the late 1990s? International Finance, 8(3), 399–434.
International Monetary Fund Research. (2005). Global imbalances: A saving and investment perspective. https://www.elibrary.imf.org/view/IMF081/08009-9781589064546/08009-9781589064546/ch02.xml?language=en, accessed on 26.05.2020.
Justiniano, A., Primiceri, G. E., & Tambalotti, A. (2014). The effects of the saving and banking glut on the U.S. economy. Journal of International Economics, 92, S52–S67.
Koo, R.C. (2004). Corporate debt rejection: The real reason global interest rates are so low. http://www.international-economy.com/TIE_F04_Koo.pdf, accessed on 26.05.2020.
Laibson, D., & Mollerstrom, J. (2010). Capital flows, consumption booms and asset bubbles: A behavioural alternative to the savings glut hypothesis. Economic Journal, 120(544), 354–374.
Ma, G., & Yi, W. (2010). China’s high saving rate: Myth and reality. International Economics, 122, 5–39.
Modigliani, F., & Cao, S. L. (2004). The Chinese saving puzzle and the life-cycle hypothesis. Journal of Economic Literature, 42(1), 145–170.
Natoli, F., & Cova, P. (2016). Global banking glut vs. global savings glut: Evidence from the recent financial crisis. https://editorialexpress.com/cgibin/conference/download.cgi?db_name=EEAESEM2016&paper_id=937, accessed on 26.05.2020.
Nezu, R. (2010). What to do with excess corporate savings? https://www.fujitsu.com/jp/group/fri/en/column/message/2010/2010-04-15.html, accessed on 26.05.2020.
Nsouli, S.M. (2006). Petrodollar recycling and global imbalances. CESifo’s International Spring Conference. Berlin: International Monetary Fund. https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp032306a, accessed on 26.0502020.
Price, C. (2010). The myth of the global savings glut. https://seekingalpha.com/article/194739-the-mythof-the-global-savings-glut, accessed on 26.05.2020.
Punzi, M.T., & Kauko, K. (2015). Testing the global banking glut hypothesis. Journal of Financial Stability, 19, 128–151.
Reiseman, G. (2009). Credit expansion, crisis, and the myth of the saving glut. https://mises.org/library/credit-expansion-crisis-and-myth-saving-glut, accessed on 26.05.2020.
Roach, S. (2009). The Shirting Mix of Global Savings. New York: Global Economic Forum.
Shin, H.S. (2012). Global banking glut and loan risk premium. IMF Economic Review, 60(2), 155–192.
Steinberg, J. (2019). On the source of U.S. trade deficits: Global saving glut or domestic saving drought? Review of Economic Dynamics, 31, 200–223.
Taylor, J.B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong. NBER Working Paper, 14631.
IMF (2004). The U.S. current account deficit and the global economy. https://www.imf.org/en/Publications/Other-Periodicals/Issues/2016/12/31/The-U-S-17872, accessed on 26.05.2020.
Turkay, M. (2018). Does international liquidity matter for G-7 countries? A PVAR approach. International Econometric Review, 10.
Warnock, F.E., & Warnock, V.C. (2006). International capital flows and U.S. interest rates. Journal of International Money and Finance, 28(6).
Wu, T. (2005). The long-term interest rate conundrum: Not unraveled yet? https://www.frbsf.org/economic-research/publications/economic-letter/2005/april/the-long-term-interest-rate-conundrum-notunraveled-yet/, accessed on 26.05.2020.
Zandi, M. (2008). Financial Shock: A 360 Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis. New York: FT Press.
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Published
2020-02-28
How to Cite
Parosa, G. (2020). Savings and Liquidity Gluts and the American Long-Term Interest Rates Before the Great Financial Crisis. Journal of Public Governance, 50(4), 63–82. https://doi.org/10.15678/ZP.2019.50.4.06
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Open Access, licence: CC-BY 4.0
