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© 2007 International Monetary Fund

August 2007

IMF Country Report No. 07/265

United States: Selected Issues

This Selected Issues paper for the United States was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on July 11, 2007. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the United States or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

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INTERNATIONAL MONETARY FUND

UNITED STATES

Selected Issues

Prepared by R. Balakrishnan, T. Bayoumi, K. Mathai, M. Mühleisen, A. Swiston, V. Tulin (all WHD); A. Bhatia, J. Kiff, P. Mills (all MCM); C. Gorter, I. Rial (both STA)

Approved by Western Hemisphere Department

July 11, 2007

Contents

  • Part I. International Links

  • I. Summary of Foreign Entanglements: Measuring the Size and Source of Spillovers Across Industrial Countries

    • Figure 1. Responses to U.S. GDP Across Eight VARs

    • Figure 2. Decomposition of Responses to U.S. GDP

  • II. Summary of The Ties that Bind: Measuring International Bond Spillovers Using Inflation-Indexed Bond Yields

    • Table 1. Variance Decompositions After 50 Days

  • III. Summary of Globalization, Gluts, Innovation, or Irrationality: What Explains the Easy Financing of the U.S. Current Account Deficit?

    • Figure 1. Financing of the U.S. Current Account Deficit

  • Part II. Financial Innovation

  • IV. New Landscape, New Challenges: Structural Change and Regulation in the U.S. Financial Sector

    • A. Topography of the System

    • B. Regulatory Philosophy and Structure

    • C. Emerging Challenges

    • D. Broad Policy Implications

    • E. Specific Policy Considerations

    • Abbreviations and Acronyms

    • References

    • Figure 1. The Shrinking Core

    • Figure 2. Waves of Securitization

    • Figure 3. Core vs. Periphery

    • Figure 4. Inside the Core

  • V. Money for Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage Markets

    • A. Origins and History of the Subprime Mortgage Market

    • B. The Rapid Recent Expansion of Subprime Lending

    • C. What Prompted the Subprime “Crisis”?

    • D. The Impact on Financial Institutions

    • E. The Impact on Households

    • F. Risk Management and Consumer Protection in the Securitization Model

    • G. Resolving the Policy Tradeoff: Palliatives versus Future Reforms

    • H. Conclusion

    • References

    • Box 1. Twisting by the Pool: The Mechanics of Mortgage Securitization

    • Box 2. Brothers in ARMs: Hybrids, Options, IOs, Neg-Ams, and Teasers

    • Figure 1. Homeownership Rate

    • Figure 2. Subprime and FHA Mortgage Originations

    • Figure 3. All Mortgage Originations

    • Figure 4. Declining Mortgage Holdings of Depository Institutions

    • Figure 5 ARM Delinquencies and Foreclosures

    • Figure 6. Subprime ARMs: Delinquencies by Mortgage Vintage Year

    • Figure 7. Delinquency Rates for Adjustable-Rate and Fixed-Rate Mortgages

    • Figure 8. Early Payment Defaults

  • Part III. Fiscal Issues

  • VI. Summary of U.S. Revenue Surprises: Are Happy Days Here to Stay?

    • Figure 1. Contribution to Revenue Increase, 2004–2006

    • Figure 2. Out-of-Sample Revenue Forecast, 2007–2009

  • VII. Summary of Applying The GFSM 2001 Framework to U.S. Fiscal Data

    • Table 1. Statement of Federal Government Operations

    • Table 2. Integrated Balance Sheet for the Federal Government

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