Thursday, March 10, 2011

Monetary Policy and the Saving Glut Both Mattered for the Boom

That is what Filipa Sá, Pascal Towbin, and Tomasz Wieladek find in their new paper. Moreover, they find that the effects of monetary policy and the saving glut were more pronounced in those economies with more developed and securitized mortgage markets.  On this latter point, Roger Ahrend similarly finds that easy monetary policy had its biggest effect on housing in periods of financial deregulation and innovation.  The Sá et al. paper also is consistent with the findings of Thierry Bracke and Michael Fidora who show that monetary policy shocks and global saving glut shocks contributed to the buildup of global economic imbalances.  These nuanced studies that take a global perspective and find both monetary policy and global savings to have mattered are far more satisfying than the "Not us!" research being pushed by former and current Fed officials lately.  

It would be nice, however, if these nuanced studies did more to tease out (1) how much of the saving glut was due to truly exogenous developments in the emerging economies versus (2) how much was due to endogenous responses by these economies to the Fed's loose monetary policy.  In other words, how much of the saving glut was simply recycled U.S. monetary policy


  1. Right.

    And BOTH fit as causes within the bounds of Hayek's malinvestment mechanism -- see Hayek's _MTandTTC_, book 4.

  2. hmm, still seems like we have a lot of work to do to understand what happened here. What do you think the effect of China buying up T-bonds was on the MBS market...didnt holders of MBS like to hedge their portfolios with T-bonds, so with more T-bonds held by China, there were less left for hedging....what were the implications of that ?

  3. Careful ECB, you are sounding like Bernanke here! Yes, China takes up a large share of treasuries and agencies creating a shortage of AAA-rated securities for others. Structured finance rides to the rescue by converting risky assets into safe ones and the rest is history.

    I respond to this demand safe assets story more fully here,but for now I would note that an argument can be made that much of non-China demand for AAA-assets was in fact created by the Fed's low interest rate policy. And, again, some of China's demand for safe assets can also be traced to U.S. monetary policy.

  4. Your last link is to the wrong post.

  5. I can't disagree that a large part of the saving glut was recycled US money supply. The saving glut story gets a lot of its plausibility from the Metzler 2-country S&I diagram beloved of undergrad textbooks. But that diagram of course is based in the discredited loanable funds model that assumes a 1-good barter economy. Keynes said his goal was a theory of a monetary economy. Hayek too wanted to achieve that but gave up because it was too hard.