Monetary Policy in a Changing International Environment: The Role of Global Capital Flows

Martin Feldstein

NBER Working Paper No. 11856
Issued in December 2005
NBER Program(s):International Finance and Macroeconomics, Monetary Economics, Public Economics

The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies over the past several decades, has important implications for tax and monetary policy.

More recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high.

This paper also examines the recent capital flows to the United States. The Treasury International Capital (TIC) reports are generally misunderstood. When they are properly interpreted, they do not indicate that they U.S. has an excess of capital flows to finance the current account deficit. The TIC data also cannot be relied on the distinguish private and government sources of the capital flow. The persistence of these flows is therefore uncertain.

The paper discusses the implications for monetary and fiscal policy of the changes in capital flows that may be happening.

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Document Object Identifier (DOI): 10.3386/w11856

Published: Martin Feldstein, "Monetary Policy in a Changing International Environment: The Role of Global Capital Flows," in Stability and Economic Growth: The Role of the Central Bank (Banco de Mexico, 2006): 245-55

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