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International financial markets and the U.S. external imbalance

  • Deborah Danker
  • Peter Hooper
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    This paper analyzes movements in the U.S. external imbalance over the 1980s from the perspective of the capital account. It considers the empirical evidence on two competing hypotheses about the causes of the large and persistent net capital inflow during the decade: one that the capital inflow was induced by a substantial increase in the expected rate of return on real fixed investment in the United States relative to other countries, and the other that strong U.S. fiscal stimulus and a declining private savings rate boosted demand for credit in the United States. ; The empirical evidence that we review on this score include the pattern and composition of capital inflows, trends in the components of U.S. domestic saving and investment, and movements in U.S. relative to foreign rates of return across different types of real and financial assets. The evidence strongly supports the view that the net capital inflow resulted from an increase in demand for credit, and not to any significant degree from an increase in the relative rate of return on real fixed investment in the United States. ; We also consider the sustainability of the U.S. external imbalance. Available empirical evidence on this score suggests that over the short to medium term at least, continued large U.S. external deficits could be absorbed manageably into foreign portfolios. Nevertheless, if those deficits continue to finance U.S. government and private consumption rather than the increased rate of domestic investment that would be needed eventually to service the associated external debt, they are not sustainable in the long run.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1990/372/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1990/372/ifdp372.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 372.

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    Date of creation: 1990
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    Handle: RePEc:fip:fedgif:372
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    1. Stephen D. Oliner, 1989. "The formation of private business capital: trends, recent developments, and measurement issues," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 771-783.
    2. Ralph C. Bryant & John Helliwell & Peter Hooper, 1989. "Domestic and cross-border consequences of U.S. macroeconomic policies," International Finance Discussion Papers 344, Board of Governors of the Federal Reserve System (U.S.).
    3. Jeffrey A. Frankel, 1991. "Quantifying International Capital Mobility in the 1980s," NBER Chapters, in: National Saving and Economic Performance, pages 227-270 National Bureau of Economic Research, Inc.
    4. Jeffrey A. Frankel & Saburo Okita & Peter G. Peterson & James R. Schlesinger, 1988. "International Capital Flows and Domestic Economic Policies," NBER Chapters, in: The United States in the World Economy, pages 559-658 National Bureau of Economic Research, Inc.
    5. Howard, David H, 1989. "Implications of the U.S. Current Account Deficit," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 153-65, Fall.
    6. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040 Elsevier.
    7. David H. Howard, 1989. "Implications of the U.S. current account deficit," International Finance Discussion Papers 350, Board of Governors of the Federal Reserve System (U.S.).
    8. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
    9. Lois Stekler, 1989. "Adequacy of International Transactions and Position Data for Policy Coordination," NBER Working Papers 2844, National Bureau of Economic Research, Inc.
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