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Monetary Policy in a Changing International Environment: The Role of Global Capital Flows

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  • Martin Feldstein

Abstract

The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies over the past several decades, has important implications for tax and monetary policy. More recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high. This paper also examines the recent capital flows to the United States. The Treasury International Capital (TIC) reports are generally misunderstood. When they are properly interpreted, they do not indicate that they U.S. has an excess of capital flows to finance the current account deficit. The TIC data also cannot be relied on the distinguish private and government sources of the capital flow. The persistence of these flows is therefore uncertain. The paper discusses the implications for monetary and fiscal policy of the changes in capital flows that may be happening.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11856.

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Date of creation: Dec 2005
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Publication status: published as Martin Feldstein, "Monetary Policy in a Changing International Environment: The Role of Global Capital Flows," in Stability and Economic Growth: The Role of the Central Bank (Banco de Mexico, 2006): 245-55
Handle: RePEc:nbr:nberwo:11856

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Cited by:
  1. Margarita Katsimi & Thomas Moutos, 2007. "Human Capital and the Feldstein-Horioka Puzzle," CESifo Working Paper Series 1914, CESifo Group Munich.
  2. Frankel, Jeffrey, 2006. "Global Imbalances and Low Interest Rates: An Equilibrium Model vs. A Disequilibrium Reality," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp06-035, Harvard University, John F. Kennedy School of Government.
  3. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," NBER Working Papers 11996, National Bureau of Economic Research, Inc.
  4. Margarita Katsimi & Thomas Moutos, 2009. "A Note On Human Capital And The Feldstein-Horioka Puzzle," Manchester School, University of Manchester, University of Manchester, vol. 77(3), pages 398-409, 06.
  5. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, Elsevier, vol. 63(2), pages 64-76, June.
  6. Dabrowski, Marek, 2006. "Rethinking balance-of-payments constraints in a globalized world," MPRA Paper 11962, University Library of Munich, Germany.
  7. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 57-100, December.
  8. Luke Willard, 2007. "Trade Costs and Some Puzzles in International Macroeconomics," RBA Research Discussion Papers, Reserve Bank of Australia rdp2007-10, Reserve Bank of Australia.
  9. Martin Feldstein, 2008. "Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(3), pages 113-25, Summer.
  10. Már Gudmundsson, 2008. "Financial globalisation: key trends and implications for the transmission mechanism of monetary policy," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Financial market developments and their implications for monetary policy, volume 39, pages 7-29 Bank for International Settlements.

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