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International Capital Flows and Domestic Economic Policies


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  • Jeffrey A. Frankel


This paper, written for the NBER Conference on the Changing Role of the United States in the World Economy, covers the capital account in the U.S. balance of payments. It first traces the history from 1946 to 1980, a period throughout which Americans were steadily building up a positive net foreign investment position. It subsequently describes the historic swing of the capital account in the 1980s toward massive borrowing from abroad. There are various factors, in addition to expected rates of return, that encourage or discourage international capital flows: transactions costs, government controls, taxes, default and other political risk and exchange risk. But the paper argues that the increase in real interest rates and other expected rates of return in the United States, relative to other countries, in the early 1980s was the major factor that began to attract large net capital inflows. It concludes that a large increase in the U.S. federal budget deficit, which was not offset by increased private saving, was the major factor behind the increase in real interest rates, and therefore behind the switch to borrowing from abroad.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2210.

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Date of creation: Apr 1987
Date of revision:
Publication status: published as Frankel, Jeffrey A. "International Capital Flows and Domestic Economic Problems," The United States in the World Economy, ed. by Martin Feldstein. Chicago: UCP, 1988.
Handle: RePEc:nbr:nberwo:2210

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Cited by:
  1. Deborah Danker & Peter Hooper, 1990. "International financial markets and the U.S. external imbalance," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 372, Board of Governors of the Federal Reserve System (U.S.).
  2. Kim, Iljoong & Kim, Inbae, 2008. "Interest group pressure explanations for the yen-dollar exchange rate movements: Focusing on the 1980s," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 22(3), pages 364-382, September.
  3. Charles Engel & James D. Hamilton, 1989. "Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?," NBER Working Papers, National Bureau of Economic Research, Inc 3165, National Bureau of Economic Research, Inc.
  4. R. Macdonald & L. Ricci, 2003. "PPP and the Balassa Samuelson Effect: The Role of the DistributionSector," DNB Staff Reports (discontinued), Netherlands Central Bank 81, Netherlands Central Bank.
  5. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, Elsevier, vol. 50(1), pages 7-11, January.
  6. Daniele Checchi, 1992. "What are the Real Effects of Liberalizing International Capital Movements?," Open Economies Review, Springer, Springer, vol. 3(1), pages 83-125, February.


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