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Financing of Global Imbalances

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Author Info

  • Maria Teresa Punzi
  • W. Christopher Walker

Abstract

This paper analyzes the determinants of bond flows, now the dominant source of capital inflows, into the United States, as a means of establishing conditions affecting the financing of the U.S. current account deficit. To test the hypothesis that capital flows have become more responsive to changes in relative interest rates and other conditions across borders, a panel data set, showing bond flows from 12 separate jurisdictions into the United States, is constructed for the period 1994-2006 using adjusted U.S. Treasury International Capital Flow (TIC) data. Panel vector autoregression and instrumental variables approaches are used to estimate the impact of changes in interest rate differentials and other fundamentals on capital flows into the U.S. The paper finds evidence for an impact from interest rate differentials to bond inflows that has increased over time. Under one plausible set of theoretical assumptions, the increased sensitivity can be interpreted as resulting from a reduction in home bias on the part of non-US investors.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/177.

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Length: 34
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/177

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Related research

Keywords: Bond issues; Capital flows; Interest rate differential;

This paper has been announced in the following NEP Reports:

References

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  1. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "A Global Perspective on External Positions," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102 National Bureau of Economic Research, Inc.
  2. Francis E. Warnock & Veronica C. Warnock, 2005. "International capital flows and U.S. interest rates," International Finance Discussion Papers 840, Board of Governors of the Federal Reserve System (U.S.).
  3. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
  4. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  5. Love, Inessa & Zicchino, Lea, 2002. "Financial development and dynamic investment behavior : evidence from panel vector autoregression," Policy Research Working Paper Series 2913, The World Bank.
  6. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  7. repec:tcd:wpaper:tep16 is not listed on IDEAS
  8. Hali J. Edison & Francis E. Warnock, 2006. "Cross-border Listings, Capital Controls, and Equity Flows To Emerging Markets," NBER Working Papers 12589, National Bureau of Economic Research, Inc.
  9. Francis E. Warnock & Veronica C. Warnock, 2005. "International Capital Flows and U.S. Interest Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp103, IIIS.
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