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international Capital Flows and Domestic Economic Policies

  • Frankel, Jeffrey A.

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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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt1q85b9j6.

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Date of creation: 05 May 1987
Date of revision:
Handle: RePEc:cdl:econwp:qt1q85b9j6
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