What Caused the Global Financial Crisis: Evidenceon the Drivers of Financial Imbalances 1999: 2007

November 1, 2010

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Ouarda Merrouche, and Erlend Nier. What Caused the Global Financial Crisis: Evidenceon the Drivers of Financial Imbalances 1999: 2007, (USA: International Monetary Fund, 2010) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates empirically the drivers of financial imbalances ahead of the global financial crisis. Three factors may have contributed to the build-up of financial imbalances: (i) rising global imbalances (capital flows), (ii) monetary policy that might have been too loose, (iii) inadequate supervision and regulation. Panel data regressions are performed for OECD countries from 1999 to 2007, so as to shed light on the relative importance of these factors, as well as the extent to which these factors might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up is amplified where the supervisory and regulatory environment was relatively weak. We find that, by contrast, differences in monetary policy cannot account for differences across countries in the build-up of financial imbalances ahead of the crisis.

Subject: Balance of payments, Bank credit, Capital flows, Capital inflows, Central bank policy rate, Commercial banks, Current account, Financial institutions, Money

Keywords: Accommodative monetary policy stance, Balance sheet, Bank credit, Bank deposit, Capital flows, Capital inflows, Central bank, Commercial banks, Current account, Current account position, Endogenous monetary policy response, Extent monetary policy, Global, Global imbalances, Inflation rate, Monetary policy, Monetary policy response, Monetary policy stance, Nominal rate, Stance need, Supervision and regulation, Taylor rule, WP

Publication Details

Pages:

64
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/265
Stock No:

WPIEA2010265
ISBN:

9781455210725
ISSN:

1018-5941

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