Capital-flows view Intertemporal trade (international borrowing and lending) Intertemporal trade (international borrowing and lending) See Chp. 1 Obstfeld and Rogoff See Chp. 1 Obstfeld and Rogoff See class notes See class notes Bottom line: Countries can gain from intertemporal trade Bottom line: Countries can gain from intertemporal trade

Global Saving Glut See Ben Bernanke (2005) “The Global Saving Glut and the U.S. Current Account Deficit” See Ben Bernanke (2005) “The Global Saving Glut and the U.S. Current Account Deficit” Diverse forces  increase in the global supply of saving  increase in U.S. current account deficit and low long-term real interest rates Diverse forces  increase in the global supply of saving  increase in U.S. current account deficit and low long-term real interest rates

Industrial countries Aging populations  high saving rates to help support future retirees Aging populations  high saving rates to help support future retirees High K/L ratios  low prospective returns on investment High K/L ratios  low prospective returns on investment

Developing countries Big swing in current account positions since mid- 1990s (see Table 1) Big swing in current account positions since mid- 1990s (see Table 1) Developing countries switch from international borrowers to international lenders Developing countries switch from international borrowers to international lenders Financial crises Financial crises Desire to build up FX reserves Desire to build up FX reserves Export led-growth strategies Export led-growth strategies Depressed investment Depressed investment High oil prices High oil prices

United States : Inflows to U.S. stock markets : Inflows to U.S. stock markets Wealth effect  higher consumer spending Wealth effect  higher consumer spending Stronger dollar  boosted imports and hurt exports Stronger dollar  boosted imports and hurt exports Post-2000: Global investment weakened Post-2000: Global investment weakened  low real interest rates  boost U.S. house prices  wealth effect Recovery in BFI and strong residential investment Recovery in BFI and strong residential investment

Concerns Capital is flowing the “wrong” way Capital is flowing the “wrong” way Capital may not be flowing into productive investment in the US Capital may not be flowing into productive investment in the US Adjustment costs related to moving resources across sectors Adjustment costs related to moving resources across sectors

Policy Implications “Capital flows” view: no reason why “imbalances” can persist for long time “Capital flows” view: no reason why “imbalances” can persist for long time “Trade flows” view: no reason why ROW will finance US deficit for extended period “Trade flows” view: no reason why ROW will finance US deficit for extended period Under both views: dollar must drop Under both views: dollar must drop Resource reallocation Resource reallocation Demand management Demand management