Speaker: Filippo Natoli, LUISS
Abstract: Two streams of literature refer to foreign capital inflows as key determinants of the overheating of the US economy in the run-up to the global financial crisis: the first focuses on the Global Savings Glut (GSG) hypothesis, i.e. on the effects on US financial conditions of net financial flows resulting from emerging countries’ excess savings; the second considers the Global Banking Glut (GBG) hypothesis, according to which an increase in dollar-denominated intermediation by global banks played a more important role. We investigate the relative importance of these two explanations, testing their effects on key US financial and real variables. Our findings confirm that both GBG flows into the US corporate bond market and GSG flows into Treasury and Agency bonds have put upward pressure on the leverage of US banks via lowered bank funding costs and falling uncertainty. Moreover, GBG flows have exerted a positive impact on households’ debt-to-income ratios, whereas housing market developments have had significant effects on GBG flows, but not vice versa.