Essays on Global Imbalances and the Financial Crisis
This thesis investigates the linkages and the underlying causes of the current episode of global imbalances and of the 2007-09 Global Financial Crisis (GFC). It consists of three independent yet interconnected essays. The first essay is a theoretical paper. It sets the scene for the theoretical debates by first describing how the GFC unfolded, its economic consequences, the causes that are identified. It is followed by a critical assessment of three competing theories to explain the linkages between the global imbalances and the GFC: the global savings glut (GSG) hypothesis, the endogenous money (EM) and the global financing glut (GFG) hypotheses. The second essay is an empirical paper, which seeks evidence for each underlying logic chain behind the three theories. It has a particular focus on how credit creation and international capital flows impact on the US housing boom, credit boom, and consequently the consumption boom, before the GFC. A partial equilibrium model is built to simulate the propagation mechanisms based on the empirical findings. The third essay is a modelling chapter. It begins with a discussion of the development of macroeconomic models in general. Following Wynne Godley’s stock-flow consistent (SFC) modelling approach, the focus of this essay is to build a fully estimated empirical SFC model for the UK. The model features detailed financial balance sheets for the banking sector, which can be used to simulate the endogenous credit creation process and the interactions between the real and the financial sector within an economy. The simulations focus on the role of housing finance in generating the economic expansions and contractions as discussed in the second paper.