International Capital Flows and Domestic Economic Policies
In: The United States in the World Economy
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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- K. Alec Chrystal, 1984. "International banking facilities," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 5-11.
- Benjamin M. Friedman, 1986. "Implications of the U.S. Net Capital Inflow," NBER Working Papers 1804, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
- Guido E. Van der Ven & John F. Wilson, 1986. "The United States international asset and liability position: a comparison of flow of funds and Commerce department presentations," International Finance Discussion Papers 295, Board of Governors of the Federal Reserve System (U.S.).
- Martin Feldstein, 1986.
"The Budget Deficit and the Dollar,"
NBER Working Papers
1898, National Bureau of Economic Research, Inc.
- Arvind Mahajan & Donald R Fraser, 1986. "Dollar Eurobond and U.S. Bond Pricing," Journal of International Business Studies, Palgrave Macmillan, vol. 17(2), pages 21-36, June.
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