Belke, Ansgar; Gros, Daniel:

Global Liquidity, World Savings Glut and Global Policy Coordination

In: Jeddah Economic Forum, (2010), S. 5-20
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
Fakultät für Wirtschaftswissenschaften » Fachgebiet Volkswirtschaftslehre » Makroökonomik
The global imbalances of the 2000s and the recent global financial crisis are
intimately connected. Both originate in economic policies followed in a couple of
countries in the 2000s and in distortions that influenced the transmission of these
policies through the US and ultimately through global financial markets. In the US,
the interaction among the Fed’s monetary stance, global real interest rates, distorted
incentives in credit markets, and financial innovation created the toxic mix of conditions
making the US the epicenter of the global financial crisis. Exchange rate and other
economic policies followed by emerging markets such as China and the oil-exporting
countries contributed to the United States’ ability to borrow cheaply abroad and
thereby finance its unsustainable housing bubble. But at the same time, the lower real
interest rates resulting from the rise in oil prices and the ever increasing Chinese savings
surplus, in turn, have facilitated adjustment to the subprime crisis.
Especially nowadays, a coordination of monetary policy is advisable as during the
financial crisis, central banks flooded the markets with ample liquidity. Drying out this
excess liquidity will be one major task for central banks worldwide as our analysis has
shown that liquidity will first show up in asset price inflation and finally end in consumer
goods inflation. If the exit from this very expansive monetary policy is not coordinated,
this might cause additional problems for the world economy.