NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis

David Laibson, Johanna Mollerstrom

NBER Working Paper No. 15759
Issued in February 2010
NBER Program(s):   AP   EFG   IFM   ITI   ME

Bernanke (2005) hypothesized that a “global savings glut” was causing large trade imbalances. However, we show that the global savings rates did not show a robust upward trend during the relevant period. Moreover, if there had been a global savings glut there should have been a large investment boom in the countries that imported capital. Instead, those countries experienced consumption booms. National asset bubbles explain the international imbalances. The bubbles raised consumption, resulting in large trade deficits. In a sample of 18 OECD countries plus China, movements in home prices alone explain half of the variation in trade deficits.

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Document Object Identifier (DOI): 10.3386/w15759

Published: David Laibson & Johanna Mollerstrom, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Economic Journal, Royal Economic Society, vol. 120(544), pages 354-374, 05.

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