Journal Article

Global imbalances and the paradox of thrift

W. Max Corden

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 28, issue 3, pages 431-443
Published in print January 2012 | ISSN: 0266-903X
Published online September 2012 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grs027
Global imbalances and the paradox of thrift

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This paper analyses the relationship between the global imbalances and the financial crisis. The imbalances were connected with the increase in world savings emanating from the ‘savings glut’ countries, notably China. This increase in savings led to a decline in world interest rates, and thus to greater borrowing, especially in the United States. This borrowing was for financing consumption, wars, and unwise rather than fruitful investment, especially in housing. The failure to invest in fruitful investments led to the financial crisis, and thus the decline in US and world-wide aggregate demand. This was the indirect paradox of thrift. It is to be contrasted with Keynes’s paradox of thrift, where the decline in aggregate demand and output would have resulted directly from the rise in world savings. The paper also discusses why there was not more borrowing for fruitful investment, especially in developing countries, hence avoiding the financial crisis.

Keywords: global imbalances; paradox of thrift; intertemporal trade; international debt; current account deficits; financial crisis; F4; F32; F34

Journal Article.  6660 words. 

Subjects: Macroeconomic Aspects of International Trade and Finance ; International Finance

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