Essays on the 2007-08 Financial Crisis and the Global Asset Shortage

• Author / Creator

  White, Robert McKay

• The twenty-year period from 1990 to 2010 exhibited significant and consequential international economic phenomena. Global imbalances, primarily the U.S. current account deficit, were very prominent, along with the development and bursting of a real estate bubble, low interest rates and saving rates, and a brief shock to the oil market in 2008. This thesis addresses these phenomena.
  The first paper addresses the question of whether speculative oil inventories were accumulated in response to conditions in asset markets, and whether such inventories were the cause of the oil price shock. Using cointegration techniques, it tests whether the arbitrage condition required for speculative inventories to be accumulated held at any period. It finds evidence that above-ground and below-ground speculative inventories were accumulated, but not at the time of the oil price shock.
  The second paper addresses the issue of how to test the dynamic efficiency of an economy. The real estate bubble in the early 2000s and the correspondingly low interest rate suggests the possibility of dynamic inefficiency in the U.S. economy. Previous methods used to test dynamic efficiency are shown to be inadequate for testing dynamic efficiency in this period. Cointegration analysis is introduced as an ideal testing methodology for determining the long-run equilibrium relationship between capital accumulation and profit and whether any bubbles mask that relationship. It finds the U.S. economy became dynamically inefficient in 2000.
  The third paper proposes a model to explain the U.S. current account deficit, low interest rate, low saving rate, and the real estate bubble. The model demonstrates how the behaviour of all four variables could have been caused by shocks to the U.S. terms of trade. These shocks initially increased domestic saving and foreign income, creating higher demand for financial assets. Greater demand for assets started the decline of the interest rate. The trade deficit created the current account deficit. The declining interest rate created dynamic inefficiency, causing the emergence of the real estate bubble. Low interest rates encouraged domestic borrowing to finance consumption. Domestic saving rates declined while foreign income continued to increase. The effect of the higher foreign supply of loanable funds was stronger than the increased domestic demand for loanable funds, resulting in a low equilibrium interest rate.

• Subjects / Keywords

  • Arbitrage
  • Asset Shortage
  • Efficiency
  • Speculation
  • Financial Crisis

• Graduation date

  Spring 2014

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/R3JM23P00

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.