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Gross capital inflows, the U.S. economy, and the response of the Federal Reserve

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  • Harrison, Andre
  • Reed, Robert R.

Abstract

In recent years, there has been a surge in capital inflows to the United States' treasury and corporate bond markets from other countries. How do these inflows affect economic activity in the United States? Does the Federal Reserve respond to such shocks? To address these important issues, we employ a sign-identified structural vector autoregressive (SVAR) model to see the effects of these types of capital inflows. Our results suggest that the U.S. economy and the Federal Reserve's balance sheet respond differently to shocks to these inflows. In particular, gross inflows to U.S. treasuries are contractionary while inflows to corporate debt are expansionary. Moreover, the Federal Reserve shrinks its balance sheet in response to shocks to gross capital inflows to U.S. treasury securities with little to no response to inflows to corporate securities. Interestingly, we find that the bulk of the Fed's response to both shocks is systematic. In this manner, the Federal Reserve's response to these shocks played only a minor role in the evolution of macroeconomic aggregates following such shocks.

Suggested Citation

  • Harrison, Andre & Reed, Robert R., 2023. "Gross capital inflows, the U.S. economy, and the response of the Federal Reserve," Journal of International Money and Finance, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:jimfin:v:139:y:2023:i:c:s0261560623001444
    DOI: 10.1016/j.jimonfin.2023.102943
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    More about this item

    Keywords

    Gross capital inflows; Macroeconomic activity; Monetary policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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