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International Capital Flows and Domestic Economic Policies

In: The United States in the World Economy

  • Jeffrey A. Frankel
  • Saburo Okita
  • Peter G. Peterson
  • James R. Schlesinger

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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This chapter was published in:
  • Martin Feldstein, 1988. "The United States in the World Economy," NBER Books, National Bureau of Economic Research, Inc, number feld88-1, September.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6221.
    Handle: RePEc:nbr:nberch:6221
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Arvind Mahajan & Donald R Fraser, 1986. "Dollar Eurobond and U.S. Bond Pricing," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 17(2), pages 21-36, June.
    2. K. Alec Chrystal, 1984. "International banking facilities," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 5-11.
    3. Benjamin M. Friedman, 1986. "Implications of the U.S. Net Capital Inflow," NBER Working Papers 1804, National Bureau of Economic Research, Inc.
    4. Martin Feldstein, 1986. "The Budget Deficit and the Dollar," NBER Working Papers 1898, National Bureau of Economic Research, Inc.
    5. 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.).
    6. Martin Feldstein, 1986. "Budget Deficits, Tax Rules, and real Interest Rates," NBER Working Papers 1970, National Bureau of Economic Research, Inc.
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