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Global Econ

In: Business and Management

Submitted By dasom
Words 4500
Pages 18
Short answer

The main macroeconomic cause of gfc

US households actually reduced their savings from 2000. The household savings rate in the US actually became negative!
Graphs ppt People save more when higher IR, Spend more when low IR
1. Monetary policy (low short term IR)
The literature has identified a number of channels through which monetary policy might have contributed to the build-up in financial imbalances. Most of these are thought to have worked through policy rates that were kept low for too long.8
Loose monetary policy (a low short-term rate) may have i) reduced the cost of wholesale funding for intermediaries, leading those intermediaries to build-up leverage ii) may more generally have caused banks to take more risks, including credit and liquidity risks
(iii) may have increased the supply of and demand for credit (mortgages), causing asset (house) prices to rise

2. Global imbalances ( low long term IR)
Rising global imbalances are associated with a greater spread of current account positions across countries and larger net flows of capital between countries. global excess of desired savings relative to desired investment—a “savings glut(과잉)”— had reduced long term rates globally, including in the United States.(significant increase of supply of saving cause a low ir), it argued that high capital inflows were an important reason of low IR from 2003- 2007
High capital inflows in turn
(i) can reduce the cost of wholesale funding for domestic banks in international markets
(ii) may reduce long–term interest rates (and thus compress spreads), causing financial institutions to lever up and investors to “search for yield” and (iii) may increase the total supply of credit to the domestic economy, causing local asset (house) prices to rise (inflation) (Risk of asset bubbles) it encourages investment , accumulation of reserves.…...

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