ABSTRACT
A rough indication of the impact of international capital flows on U.S. finandal markets can be gained by comparing foreign and domestic investment and borrowing in the U.S. domestic market. The following is an attempt to outline ways in which foreign flows influenced domestic credit flows from 1969 through 1981, with foreign and domestic sources and uses of funds expressed as ratios of nominal GNP (see Table B.1). While foreign flows became a focus for concern in the 1980s, these data indicate that their impact on U.S. finandal markets and the U.S. economy was no less significant in the 1970s. For example, the comparisons in Table B.1 show:
• The impact of foreign flows on the volume of credit. Net foreign flows change the amount of credit raised by domestic borrowers. In the period 1969 through 1974, cumulative net foreign inflows increased the total amount of funds supplied to domestic borrowers by an amount equal to 0.6 percent of the average level of nominal GNP over the amount supplied by domestic investors. In the period 1979 through 1981, however, credit market funds raised by domestic borrowers fell relative to domestic investment by an amount equal to 0.5 percent of the average level of nominal GNP. • Increased volatility in credit fIows. Foreign flows are very volatile, and their effects on U.S. credit markets were stronger in individual years than average levels for selected periods. Total borrowing by domestic sectors in U.S. credit markets was greater than total funds supplied by domestic
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investors by an amount equal to 1.1 percent of nominal GNP in 1969, 1.6 percent in 1971, and 1.5 percent in 1977. But domestic borrowing fell relative to domestic investment by an amount equal to 0.9 percent of nominal GNP in 1975, 1.2 percent in 1980, and 0.4 percent in 1981. Despite a significant increase in govemment borrowing as a share of GNP in 1971, private domestic borrowing was larger than US. private investment by an amount equal to 0.4 percent of nominal GNP. • The contribution of foreign flows to credit expansion and inflation. Sharp increases in the ratio of total credit to GNP, in 1971 and 1977 suggest that excessive credit expansion, fueled by net foreign inflows, was a primary stimulus to inflation. Had credit expansion merely accommodated inflationary pressures, increases in the ratio of credit to nominal GNP in the 1970s would have been substantially smaller. Such sizable spurts in the ratio as occurred in these years suggest that credit expansion significantly outpaced the rise in prices and thus contributed to inflationary pressures. • An amplification of policy initiatives. Net foreign inflows are associated with increases in domestic borrowing relative to GNP, and net outflows with a decline in the ratio. This does not mean that changes in foreign flows are the dominant influence on U.S. credit flows, but it suggests that net foreign flows have tended to respond procyclically to domestic influences in most years during the 1970s, with larger net inflows during periods of monetary ease and larger net outflows in the wake of a more restrictive monetary policy. Thus, net foreign flows increased the amplitude of monetary policy initiatives, resulting in a greater expansion or contraction of credit than would have been the case in their absence. • The absence of offsetting responses. Therefore, as a comparison of the ratios of funds raised and supplied by the US. private sector before and after 1969 suggests, monetary policy tools that rely on steady growth in bank reserves and in the amount of funds supplied to credit markets by the central bank will have less influence on private domestic borrowing and investment under conditions of financial interdependence. On the other hand, it could be argued that, although other channels for lending by the US. govemment-particularly lending by federal agencies to the housing market-also contributed to the amount of funds supplied by the public sector, the absence of a significant change in the ratio of funds supplied by this sector implies that the Federal Reserve did not adhere to a policy of steady real growth in money and credit in the 1970s; it accommodated the rise in nominal GNP. But the absence of a significant change in this ratio also implies that changes in the amount of funds supplied by govemment agencies and the Federal Reserve after 1969 were not the only channel for the expansion and contraction of credit that are reflected in the more volatile ratios of total credit to GNP in these years. It does suggest, however, that-except in 1972, when the ratio of funds supplied
by the public sector fell sharply (in an election year!)-fiscal and monetary authorities made no attempt to offset changes in credit induced by net foreign flows.
