Low Interest Rates and International Capital Flows
Mendoza and Quadrini had proposed in 2009 that Financial Globalization is one of the cause of Financial Contagion and crisis.
Ben Bernanke has proposed Savings Glut in the emerging market countries as the cause of depressed real interest rates in advanced economies. Return to safe assets.
Larry Summers, since 2013, has proposed Secular Stagnation as a cause of depressed interest rates. He says that the IS curve has shifted to the left.
Hyun Song Shin has proposed Banking Glut as the cause of low real interest rates. Round Tripping of US dollars through European Banks has created depressed real interest rates in USA.
Junji Tokunaga and Gerald Epstein have proposed US Dollar based Global shadow Banking system as the cause of financial fragility. Role of Offshore Financial Centers.
Stanley Fischer says that low productivity growth and demographic changes are also to be blamed.
We also need to look at changes in IIP (International Investment Positions) of USA over the years. Impact of NAFTA and Trade with China also need to be studied. What happens when a corporate borrows cheap money in USA and invests overseas lets say in China or Mexico? What are the impacts on Real Interest rates?
Another perspective: What is the impact of Declining Real Interest Rates on the Capital Flows? Do declining Net Interest Margins of Banks influence capital flows? Is the Causality other way round from Low Interest rates to Increase in Capital Flows?
Causes of Low Real Interest rates including capital in-flows:
- Global Savings Glut
- Global Banking Glut
- Eurodollars In-flows
- Weak Foreign Economic Growth
- Low Investments
- Increased Savings
- Weak Demand ( Inverse Says Law)
- Debt Overhang
- Liquidity Trap
- Supply Side effects
From The Age of Secular Stagnation
Other explanations for what is happening have been proposed, notably Kenneth Rogoff’s theory of a debt overhang, Robert Gordon ’s theory of supply-side headwinds, Ben Bernanke’s theory of a savings glut , and Paul Krugman’s theory of a liquidity trap. All of these have some validity, but the secular stagnation theory offers the most comprehensive account of the situation and the best basis for policy prescriptions. The good news is that although developments in China  and elsewhere raise the risks that global economic conditions will deteriorate, an expansionary fiscal policy by the U.S. government can help overcome the secular stagnation problem and get growth back on track.
From Financial Globalization, Financial Crises and Contagion
The global financial crisis that started with the meltdown of the U.S. sub- prime mortgage market in 2007 was preceded by a twenty-year period of substantial growth in debt and leverages, in an environment of increasing world financial integration, low real interest rates and growing U.S. external deficits. During this period of widening “global imbalances” we also observed large financial crises in emerging economies with cross-country contagion that in some cases did not appear to be motivated by fundamental forces. Some of these crises affected the capital markets of the industrial world (particularly the LTCM crisis in the aftermath of the 1998 Russian crash).
These events have generated a large body of research with well-established contributions. Until now, however, the study of global imbalances and the study of financial crises and contagion have remained somewhat separate subjects. In particular, the study of financial or currency crisis has mostly been focused on emerging economies in a small economy set-up. In contrast, this paper addresses the question of whether the ongoing global financial crisis and the process of financial globalization are related. In particular, we study two key issues. First, we study how financial globalization contributed to the buildup of very high leverages in some industrialized countries, especially the U.S. Second, we study how credit frictions can amplify the effects of credit shocks on asset prices and how these effects are transmitted across countries in a world that is financially integrated.
The motivation for this project derives from the evidence provided by Figure 1 showing that the U.S. credit boom was largely fueled by foreign lending.
The first panel of Figure 1 shows that the net debt-income ratio of the U.S. non financial sectors doubled between 1982 and 2008 (net credit market assets as a ratio of GDP of these sectors fell from -1 to about -2). A surge in net debt of this magnitude, which affected all three broad U.S. non financial sectors (households, non financial businesses, and the government), is unprecedented in the data available since 1946.Starting in the mid 1980s, the integration of world capital markets that resulted from the removal of capital controls and innovations in financial markets produced significant changes in gross and net foreign asset positions worldwide (see Lane & Milesi-Ferretti (2006)). In the United States, both gross and net foreign borrowing rose sharply. Regarding net foreign credit, about half of the increase in the net debt-income ratio of the non financial sectors mentioned above was financed by a rise in net credit assets held by the rest of the world (see again the top panel of Figure 1), and this was also an unprecedented phenomenon in the post-war period. Before the mid 1980s, the U.S. fitted well the definition of financial autarky: The net debt of the domestic non financial sectors was almost identical to the net credit assets of the financial sector, with a zero net credit position for the rest of the world.2 In terms of gross positions, the second panel of Figure 1 shows that the foreign credit claims on U.S. non financial sectors grew sharply since 1985, while U.S. lending to foreigners (i.e. claims of the U.S. non financial sectors on foreign agents) experienced a relatively modest increase. As a result, net credit assets held by the rest of the world grew by 50 percent of U.S. GDP since 1982.
The above trends identified in net credit assets are even more pronounced for net total financial assets and net Treasury securities, as shown in the bottom panel of Figure 1. The plot shows the net asset positions of the U.S. vis-a-vis the rest of the world as a ratio of the corresponding net asset positions held by the domestic non financial sectors for three asset categories: credit market assets (as in the top two panels), total financial assets, which include non-credit assets like equity, and U.S. Treasury bills. The ratios for credit assets and total financial assets hover near zero before the mid 1980s, reflecting again the fact that before financial globalization the U.S. was effectively in financial autarky. By the end of 2008, however, net credit assets held by the rest of the world amounted to 1/5 of U.S. net credit liabilities of the non financial sectors, and for total financial assets the ratio was even higher at about 1/3. For T-bills, the rest of the world increased its positive net position sharply with the collapse of the Bretton Woods system in the early 1970s, but even that increase dwarfs in comparison with the surge observed since the mid 1980s. By 2008, the rest of the world was a net holder of about one in every two T-bills held outside of the U.S. financial sectors.
The fact that a large fraction of the credit expansion experienced by the U.S. economy was financed by foreign borrowing raises a key question: Did the globalization of financial markets contribute to the current crisis? In particular, we are interested in understanding how financial globalization contributed to the surge in debt in the United States, how it might have influenced the volatility of asset prices and the spillover of the crisis across countries.
From The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach
Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat  and Shin ), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.
Key Sources of Research:
Financial Globalization, Financial Crises and Contagion
Enrique G. Mendoza
March 25, 2009
Global imbalances and the financial crisis: Link or no link?
by Claudio Borio and Piti Disyatat
Monetary and Economic Department May 2011
Global Imbalances and the Financial Crisis: Products of Common Causes
Maurice Obstfeld and Kenneth Rogoff
U.S. Monetary Policy, ‘Imbalances’ and the Financial Crisis
The Global Saving Glut and the U.S. Current Account Deficit
Remarks by Governor Ben S. Bernanke
At the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia
March 10, 2005
International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007
Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin
The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach
Junji Tokunaga and Gerald Epstein
Global Banking Glut and Loan Risk Premium
Hyun Song Shin
Princeton University firstname.lastname@example.org
Global Banking Glut and Loan Risk Premium
Hyun Song Shin
IMF Annual Research Conference November 10-11, 2011
Global liquidity: where it stands, and why it matters
Speech by Jaime Caruana
IMFS Distinguished Lecture at Goethe University Frankfurt, 5 March 2014
Global savings glut or global banking glut?
Hyun Song Shin
20 December 2011
Persistent unusually low interest rates. Why? What consequences?
Three BIS research themes in the Annual Report
Hyun Song Shin
Eugenio Cerutti, Stijn Claessens, and Lev Ratnovski1
June 1, 2015
Cross-border banking and global liquidity
by Valentina Bruno and Hyun Song Shin
Trilemmas and Tradeoffs: Living with Financial Globalization
June 28, 2014
Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence
Issued in May 2015
Financial Globalization and Monetary Policy
Steven B. Kamin
Trilemma, Not Dilemma:
Financial Globalisation and Monetary Policy Effectiveness
Financial Globalization and Monetary Policy
Michael B. Devereux and Alan Sutherland
Low long-term interest rates as a global phenomenon
Impact of Globalization on Monetary Policy
Kenneth S. Rogoff
A primer on ‘global liquidity’
Eugenio Cerutti, Stijn Claessens, Lev Ratnovski
08 June 2014
GLOBAL LIQUIDITY—ISSUES FOR SURVEILLANCE
Global Liquidity: Public and Private
CAPITAL FLOWS AND GLOBAL LIQUIDITY
The Age of Secular Stagnation
Why are interest rates so low?
Ben S. Bernanke
Monday, March 30, 2015
Low Interest Rates
October 5, 2016
Why Are Interest Rates So Low? Causes and Implications
Longer-Term Challenges for the U.S. Economy
November 21, 2016
The Eurodollar Market in the United States
Marco Cipriani and Julia Gouny
The FR 2420 Data Collection: A New Base for the Fed Funds Rate
Marco Cipriani and Jonathan Cohn
The New Overnight Bank Funding Rate
Marco Cipriani, Julia Gouny, Matthew Kessler, and Adam Spiegel
Eurodollar banking and currency internationalisation
Dong He and Robert McCauley
Segmentation in the U.S. Dollar Money Markets During the Financial Crisis
James J. McAndrews
May 19, 2009
All about the eurodollars
LONG-TERM INTEREST RATES: A SURVEY
Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation
Lawrence H. Summers
Global dollar credit: links to US monetary policy and leverage
by Robert N McCauley, Patrick McGuire and Vladyslav Sushko
INTERNATIONAL CAPITAL FLOWS AND U.S. INTEREST RATES
Francis E. Warnock
Veronica Cacdac Warnock
Low Interest Rates and Housing Booms: the Role of Capital Inflows, Monetary Policy and Financial Innovation