Bernanke recaps his interpretation of the explanation for global imbalances. Is it any more convincing than the first time?
From his speech in Berlin on Monday:
Global Imbalances: Recent Developments and Prospects
In a speech given in March 2005 (Bernanke, 2005), I discussed a number of important and interrelated developments in the global economy, including the substantial expansion of the current account deficit in the United States, the equally impressive rise in the current account surpluses of many emerging-market economies, and a worldwide decline in long-term real interest rates. I argued that these developments could be explained, in part, by the emergence of a global saving glut, driven by the transformation of many emerging-market economies–notably, rapidly growing East Asian economies and oil-producing countries–from net borrowers to large net lenders on international capital markets. Today I will review those developments and provide an update. I will also consider policy implications and prospects for the future.
A principal theme of my earlier remarks was that a satisfying explanation of the developments in the U.S. current account cannot focus on developments within the United States alone. Rather, understanding these developments and evaluating potential policy responses require a global perspective. I will continue to take that perspective in my remarks today and will emphasize in particular how changes in desired saving and investment in any given region, through their effects on global capital flows, may affect saving, investment, and the external balances of other countries around the world.
There’s been some commentary elsewhere, by Brad Setser, Mish, Greg Mankiw, among others. For me, I will focus in on what I think are the most problematic aspects of his new discussion, and refer readers to other issues I’ve covered in the past, here: , , , and .
Consider this paragraph:
In fact, there is no obvious reason why the desired saving rate in the United States should have fallen precipitously over the 1996-2004 period. Indeed, the federal budget deficit, an oft-cited source of the decline in U.S. saving, was actually in surplus during the 1998-2001 period even as the current account deficit was widening. Moreover, a downward shift in the U.S. desired saving rate, all else being equal, should have led to greater pressure on economic resources and thus to increases, not decreases, in real interest rates. As I will discuss later, from a normative viewpoint, we have good reasons to believe that the U.S. saving rate should be higher than it is. Nonetheless, domestic factors alone do not seem to account for the large deterioration in the U.S. external balance.
First, as I’ve noted previously, arguments like this related to the budget balance should be banished from intelligent conversation. Or at the least, anybody who’s ever run a regression with more than two variables should not be saying pointing to two variables’ movements as a proof. This is why I don’t use the fact that “…between 2000 and 2005, there was approximately a 4.3 percentage point swing in the Federal budget balance, and a 2.2 percentage point swing in the current account balance” as proof conclusive of my twin-deficits perspective, but rather prefer to rely on regression estimates (see this post).
Second, I think that it is a debatable point that there is no obvious reason why saving rates should have decreased in the U.S. over the 1996-2004 period. In fact, given that real interest rates have been quite low in the early 2000′s, it’s a rather odd statement.
While I’m not going to assert that monetary policy was the cause of unnaturally low real interest rates (that in turn might have contributed to the housing boom and the associated mortgage equity withdrawal…), I will claim there is a plausible argument that the extended period of monetary ease was a contributing factor. It’s even more plausible, when one considers the rise in real (risk free) real interest rates even as China and oil exporting countries continue to run large surpluses after the increase in the target Fed Funds rate. This latter observation is documented in this post from January. (I’ll also observe the notion of real interest rates being equalized across borders with free capital mobility is not necessarily validated by the data — so low US real interest rates might or might not be indicative of anything, .) It all sort of depends whether you think relative PPP holds instantaneously; if you don’t think so, then monetary policy can cause divergences in real interest rates.
While my remarks might seem critical, I want to stress that I think there are some aspects of the global saving glut explanation (I prefer investment drought explanation) that are important; East Asian current account balances appear larger than what is predicted by historical relationships involving demographics and budget balances. And what is more important, in this speech Bernanke allows that other factors might be important in pushing interest rates low:
Once again, however, I do not want to rely exclusively on this line of explanation for the behavior of long-term real interest rates, as other factors have no doubt been relevant. In particular, term premiums appear recently to have risen from what may have been unsustainably low levels, in part because of the greater recent volatility in financial markets and investors’ demands for increased compensation for risk-taking.
To sum up, the Bernanke explanation for the US current account deficit relies upon a particularly small effect of budget deficits on current account deficits, and treats the US housing boom and associated mortage equity withdrawal as largely exogenous, or primarily a function of foreign excess saving. If you believe these points, then the saving glut story is the story for you.
By the way, Bernanke’s thesis still ignores — as Brad Setser cogently points out — the role of the official sector…