Our paper investigates how macroeconomic fundamentals correlate with net capital inflows in the US. Understanding the factors associated with capital flows helps policy makers to predict future capital flows and analyse the international implications of domestic macroeconomic policy. Yet the theoretical relationship between net capital inflows and relative economic conditions is ambiguous. Using quarterly data from 1988 to 2003, we analyse the relation between a set of relative macroeconomic variables and net purchases of US stocks and bonds from Western Europe, Canada, Japan and Australia. We find that relative output growth is uncorrelated with net US investment for all regions. However, other macroeconomic factors matter; for example, an increase in US interest rates relative to European interest rates is associated with an increase in net portfolio investment from Europe. The linkages between à We wish to thank Tomas Dvorak, International Finance 8:2, 2005: pp. 303-327 macroeconomic factors and net foreign investment in the US are strongest for Western Europe, implying that information costs, home bias and other capital frictions are less relevant for US-Europe flows compared with capital flows between the US and the other three source regions. Lastly, stock purchases are more correlated with macroeconomic fundamentals than bonds, a striking finding suggesting that equity traders are more likely than bond traders to change their net asset holdings as a result of a macroeconomic event.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.