Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis

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1 Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters. Citation Published Version Accessed Citable Link Terms of Use Laibson, David, and Johanna Mollerstrom Capital flows, consumption booms and asset bubbles: a behavioural alternative to the Savings Glut Hypothesis. Economic Journal of London 120(544): doi: /j x February 26, :09:10 AM EST This article was downloaded from Harvard University's DASH repository, and is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at (Article begins on next page)

2 NBER WORKING PAPER SERIES CAPITAL FLOWS, CONSUMPTION BOOMS AND ASSET BUBBLES: A BEHAVIOURAL ALTERNATIVE TO THE SAVINGS GLUT HYPOTHESIS David Laibson Johanna Mollerstrom Working Paper NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA February 2010 This paper was developed from the Frank Hahn Lecture, delivered at the Royal Economic Society Meeting in spring We acknowledge terrific research support from Kyle Chauvin. We are grateful for the advice of Effi Benmelech, Alan Blinder, Emmanuel Farhi, Benjamin Friedman, Edward Glaeser, Owen Lamont, Jaewoo Lee, Andrei Shleifer, Jeremy Stein, Luis Viceira and participants at the Royal Economic Society Meeting in Laibson acknowledges financial support from the National Science Foundation (DMS ) and the National Institute on Aging (R01-AG , R01-AG-1665, P30-AG ). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research by David Laibson and Johanna Mollerstrom. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source.

3 Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis David Laibson and Johanna Mollerstrom NBER Working Paper No February 2010 JEL No. E02,F01,G01 ABSTRACT Bernanke (2005) hypothesized that a global savings glut was causing large trade imbalances. However, we show that the global savings rates did not show a robust upward trend during the relevant period. Moreover, if there had been a global savings glut there should have been a large investment boom in the countries that imported capital. Instead, those countries experienced consumption booms. National asset bubbles explain the international imbalances. The bubbles raised consumption, resulting in large trade deficits. In a sample of 18 OECD countries plus China, movements in home prices alone explain half of the variation in trade deficits. David Laibson Department of Economics Littauer M-12 Harvard University Cambridge, MA and NBER dlaibson@harvard.edu Johanna Mollerstrom Department of Economics Littauer Center Harvard University Cambridge, MA jmollers@fas.harvard.edu

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25 Figure1:C Source:Ec Figure2:H Source:Ec Nederland generate CurrentAccou conomistinte HousingPrice conomistinte dschebank,b thisfigurear untbalancea elligenceunit, eappreciation elligenceunit, BEA.Thearea eexplainedin aspercentage,oecd,bean nvscurrenta,oecd,imf, aofeachcircl nsectioniii.b 22 eofgdp,us, NIPA,StateA AccountAccu StateAdmini eisproportio Bandthepeak China,OECD Administration mulation,199 istrationoffo onalto2008g kquartersare andbric nofforeigne 96peakofh oreignexchan GDP.Thecalc ereportedin Exchange(Chi housingmark nge(china),d culationsused Table1. ina) ket De dto

26 Figure3:USCurrentAccountDeficitasPercentageofGDP, Source:BEANIPA Figure4:USInvestmentRate(I/GDP), Source:BEANIPA 23

27 Figure5:USResidentialInvestment,PercentageofGDP, Source:BEANIPA Figure6:GlobalInvestmentRateandSavingsRate, Source:IMF.Datafor2007and2008arepreliminaryestimates. 24

28 Figure7:Predictedchangeininvestmentrateandrealinvestmentratedata(US),percent Source:BEANIPA,Owncalculations Figure8:HouseholdnetworthdividedbyGDP,US Source:FederalReserveBoard,BEA,andauthorscalculations 25

29 Figure9:HousingPriceAppreciationvsBalanceofTradeAccumulation,1996 peakofhousingmarket Source:EconomistIntelligenceUnit,,OECD,IMF,StateAdministrationofForeignExchange(China),De NederlandscheBank,BEA.Theareaofeachcircleisproportionalto2008GDP.Seetextforexplanation ofcalculationsandseetable1forpeakquarters Figure10: :USRealYield Source:FederalReserveBoard 26

30 Table1:PeakDate(Year:Quarter)forHousingPriceBubble Country Australia Canada China Denmark Finland France Germany Ireland Italy Japan Korea Netherlands NewZealand Norway Spain Sweden Switzerland UnitedKingdom UnitedStates PeakDate 2008:1 2007:4 2008:1 2007:1 2007:4 2007:4 nobubble 2006:3 2007:4 nobubble 2007:1 2008:1 2007:3 2007:3 2007:3 2007:4 nobubble 2007:4 2006:4 Source:EconomistIntelligenceUnit,NationalBureauofStatisticsofChina,OECD,andauthors calculationsasdescribedintext. Table2:Resultsfromweightedregressions Dependentvariable Coefficientestimate pvalue Rsquare CAaccumulation,1996peak BoTaccumulation,1996peak(incl.Ireland) BoTaccumulation,1996peak(ex.Ireland) Source:OECD,NationalBureauofStatisticsofChina,EconomistIntelligenceUnit,Owncalculations 27