Media Briefings

Asset Price Bubbles Drove Global Trade Imbalances

  • Published Date: May 2010

Fed chairman Ben Bernanke’s ‘savings glut’ hypothesis to explain large global imbalances in trade between deficit countries like the United States and surplus countries like China is at odds with the data, according to Professor David Laibson and Johanna Mollerstrom of Harvard University.

They argue that what really happened is that stock market and housing market bubbles in certain developed countries led consumers in those countries to increase consumption, thereby producing large trade deficits in the bubble countries.

Their analysis, published in the May 2010 issue of the Economic Journal, shows that countries that experience an asset bubble should also experience a consumption boom and a commensurate trade deficit. They validate this prediction empirically. The figure below plots the cross-sec­tional relationship between cumulative house price appreciation (on the horizontal axis) and the cumulative trade surplus (on the vertical axis).

The figure shows that countries that did not experience large increases in residential housing prices ran trade surpluses. For example, Germany, Japan, Korea and Switzerland did not experience housing price appreciation during the bubble years, and these developed countries ran large trade surpluses.

In the United States in contrast, a $15 trillion bubble in equity markets and resi­dential real estate markets made households feel wealthier, giving rise to a con­sumption boom and large trade imbalances peaking at 6% of GDP in 2006.

Since the late 1990s, there has been a debate about the causes and effects of large global imbalances in trade. Why has the United States run such a large trade deficits while other countries, such as China, ran enormous surpluses?

Laibson and Mollerstrom take a closer look at the leading explanation for the imbalances, namely Bernanke’s saving glut hypothesis, and conclude that it is at odds with the data. Most importantly, there actually was no increase in global savings (or investment). Laibson and Mollerstrom provide an alternative explanation for the global trade imbalances, based on the existence of asset price bubbles.

In 2005, Bernanke gave two influential speeches that launched the hypothesis of a global sav­ing glut as the cause of the world’s trade imbalances in general and the large US current account deficit in particular. Bernanke’s statement placed the underlying cause – and hence in some ways the responsibility – for the US imbalances outside the United States.

Laibson and Mollerstrom evaluate Bernanke’s saving glut hypothesis. They study a model in which the United States receives exogenous capital inflows that match the current account deficits for the period that Bernanke was analysing.

The model shows that such a course of events should indeed lead to a modest increase in US consumption and an even bigger increase in US investment: the investment rate should have risen by at least 4% of GDP. Laibson and Mollerstrom show that such a large investment boom did not occur.

Laibson and Mollerstrom’s alternative explanation for the unbalanced financial flows does a better job of matching the data.


Notes for editors: 'Capital Flows, Consumption Booms and Asset Bubbles: A Behavioral Alternative to the Savings Glut Hypothesis' by David Laibson and Johanna Mollerstrom is published in the May 2010 issue of the Economic Journal.

The authors are at Harvard University.

The two speeches by Ben Bernanke are 'The global savings glut and the US current account deficit: Remarks by Gover­nor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia', Federal Reserve Board of Governors (2005) and 'The global savings glut and the US current account deficit: Remarks by Gover­nor Ben S. Bernanke at the Homer Jones Lecture, St. Louis, Missouri', Federal Reserve Board of Governors (2005).

For further information: contact David Laibson on +1-617-496-3402 (email:; Johanna Mollerstrom on +1-617-850-5561 (email:; or Romesh Vaitilingam on 07768-661095 (email: