^*Ravi Balakrishnan, Tamim Bayoumi, and Volodymyr Tulin are economists at the IMF. The authors thank Gianluca Benigno, Nigel Chalk, Cathy Mann, Gian Maria Milesi-Ferretti, Hyon Song Shin, Ranjit Teja, and Chris Walker for comments; as well U.S. officials from the Treasury, the Federal Reserve Board, and the Office of the Comptroller of the Currency who participated in a seminar at the Fund.

Abstract

This paper examines the roles of U.S. financial innovation, financial globalization, and the savings glut hypothesis in explaining the rise in U.S. external debt, first in a portfolio balance model, and then empirically. Perhaps surprisingly, financial deepening and falling home bias in industrialized countries explain a large share of external financing. The savings glut hypothesis (including difficult-to-track petrodollar recycling) and U.S. financial innovation also play a role, in part as a cause of declining home bias in industrialized countries. The latter underscores the importance of not looking at these factors in isolation, but rather as a constellation of forces that can be self-reinforcing.