ABS Inflows to the United States and the Global Financial Crisis

The “global saving glut” (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.

Gardens of happiness: Sir William Temple, temperance and China

This is the author accepted manuscript. The final version is available from Taylor & Francis via the DOI in this recordSir William Temple, an English statesman and humanist, wrote “Upon the Gardens of Epicurus” in 1685, taking a neo-epicurean approach to happiness and temperance. In accord with Pierre Gassendi’s epicureanism, “happiness” is characterised as freedom from disturbance and pain in mind and body, whereas “temperance” means following nature (Providence and one’s physiopsychological constitution). For Temple, cultivating fruit trees in his garden was analogous to the threefold cultivation of temperance as a virtue in the humoral body (as food), the mind (as freedom from the passions), and the bodyeconomic (as circulating goods) in order to attain happiness. A regimen that was supposed to cure the malaise of Restoration amidst a crisis of unbridled passions, this threefold cultivation of temperance underlines Temple’s reception of China and Confucianism wherein happiness and temperance are highlighted. Thus Temple’s “gardens of happiness” represent not only a reinterpretation of classical ideas, but also his dialogue with China.European CommissionLeverhulme Trus

Stochastic behavior of the world economy under alternative policy regimes

This paper uses a multicountry econometric model with rational expectations to analyze the effects of alternative monetary policy regimes on the stability of various macroeconomic variables in the face of stochastic shocks to the economy. The policy regimes use a short-term interest-rate instrument to respond to deviations of various target variables from their targeted values. The principal conclusions are that there are significant tradeoffs between stabilizing output and stabilizing prices, and that more aggressive targeting can lead to large increases in interest-rate variability with only small reductions in the variability of the target variable.Monetary policy ; Macroeconomics

Price and output stability under alternative monetary policy rules

Monetary policy ; Macroeconomics

Macroeconomic Effects of Projected Population Aging in Industrial Countries

The effects of population aging are examined with a theoretical model and simulations of MULTIMOD. An older population will consume more of aggregate disposable income, require higher government expenditure, and decrease labor supply. These effects should raise real interest rates and lower capital stock and output. Effects on current balances will depend on the relative speed and extent of aging. Simulations of projected demographic changes suggest that by 2025, real interest rates would be increased in all countries, and net foreign assets would be increased in the United States and decreased in the Federal Republic of Germany and Japan.

Monthly estimates of U.S. cross-border securities positions

This paper reports monthly estimates of U.S. cross-border securities positions obtained by combining the (now) annual TIC surveys with monthly transactions data adjusted for various differences in the two reporting standards. Our approach is similar to that of Thomas, Warnock, and Wongswan (2004), but in addition to having a somewhat larger dataset we are able to make some simplifications to the numerical procedure used and we incorporate additional adjustments to the transactions data. This paper describes the procedure used and presents the monthly results. In addition, we discuss how the procedure can be extended to extrapolate holdings estimates beyond the most recent survey values. We focus primarily on U.S. liabilities to foreign holders, because more data is available than for U.S. claims, but we show how our methodology can be applied to U.S. claims as well. We also provide some guidance on how the changes in estimated holdings can be decomposed into flows, valuation changes, and other factors. Time series of estimates of holdings, by country, are available for download.Investments, Foreign ; Securities