In the last chapter, I presented evidence linking the current account deficit to the US housing boom, which raises the question of what drove the increase in the current account deficit. In this chapter, I explore the cause of the growth of the current account deficit and the accompanying capital flow bonanza during the US housing boom. There are several candidate explanations: perhaps the United States needed the offshore savings to augment its deficient domestic savings. Perhaps foreign investors presumed the United States to be a safer place to invest their savings than elsewhere. Perhaps they supposed the United States to have unexploited prospects for earning high returns. Or perhaps something else motivated offshore investors to pile into US securities. This is a crucial matter, since it is necessary to identify the forces that generated the US current account deficit in order to understand the housing boom. To set the stage for consideration of this question, I review some of the key macroeconomic conditions that prevailed during the housing boom.
Financial Crisis Current Account Real Exchange Rate Real Interest Rate Current Account Deficit
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Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Deficit,” Speech at the Sandbridge Lecture, Virgina Association of Economists, March 10, 2005, available at http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/.Google Scholar
See Christopher D. Carroll, Misuzu Otsuka, and Jirka Slacalek, “How Large Is the Housing Wealth Effect? A New Approach,” National Bureau of Economic Research Working Paper No. 12746, 2006.CrossRefGoogle Scholar
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