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S. BASCO
Equation (4.15) repeats the idea that the current account can be defined as the difference between the demand and the supply of assets (including the bubble). We discuss two periods: (i) pre-bubble (1990–1995) and (ii) bubble episodes (1996–2007). In the pre-bubble period, there was no bubble in the United States. In this case, the globalization process affects the current account only through its effect on the interest rate. As we have seen, when the financially developed economy integrates with a financially underdeveloped economy, the interest rate falls (see Fig. 4.2). The supply of assets (DU) declines with the interest rate and the demand of assets (AU) increases with the interest rate. Thus, a decline in the interest rate implies that the difference between DU and AU increases. That is, the current account falls when the interest rate declines. In other words, the current account falls as financial globalization progresses because middle-aged agents in financially underdeveloped economies purchase assets in the United States. As we can see from Fig. 4.1, this empirical prediction fits the evolution of the current account in the United States during this period. Indeed, the current account (over GDP) decreased from −1.3% in 1990 to −1.5% in 1995. Next, we turn to the bubbles period. Equation (4.15) implies that at the start of the Dot-Com Bubble (1996) there is a further decline in the current account. That is, when there is a bubble, the current account declines because the size of the bubble increases with the level of financial globalization. In 2000, the bubble burst and, thus, the current account should suddenly improve. In 2002, a second bubble emerges (the Housing Bubble) which should decrease the current account again. The peak of bubble is 2006. Thus, the current account should suddenly increase in 2007 once the bubble has burst. Note that for these predictions, it does not matter if the bubble is attached to houses or stocks. They only depend on the prediction that the size of the bubble increases with the level of financial globalization. The evolution of the current account in the United States during 1996 and 2007 fits very well this narrative. The trend on the current account (over GDP) was negative between 1996 and 2000 (it went from −1.5 to −3.9%). It reached the minimum in 2000 (the peak of the Dot-Com Bubble) and it continued to decrease from 2001 to 2006 (it declined from −3.6 to −5.8%). The current account stopped decreasing in 2006 (the peak of the Housing Bubble) and it suddenly increased from 2006 to 2007. After 2007, the economy enters into a global recession and the financial globalization
