| This paper presents an analysis of foreign capital flows into the United States economy. The real, as well as financial, economy is covered. Foreign capital inflows are considered to be beneficial to the U.S. economy as they allow domestic investment to exceed the available domestic savings. However, the utilization of foreign capital is not risk free. Economic weakness may result if foreigners withdraw their capital from the United States.; In 2000, foreign capital financed 32% of American fixed investment and 19% of financial investment. Additionally, foreigners have accumulated sizable holdings of various U.S. assets that might be withdrawn or liquidated, depending on the economic conditions overseas. Foreign accumulation of major U.S. financial assets was found to be: corporate bonds, 22%; treasuries, 35%; and at least 11% equity.; This study also includes an empirical model used to quantify the aggregate effect of foreign acquisitions of U.S. financial assets on the S&P-500 index. The results show that, on average, and controlling for other variables, 100 billion dollars of foreign purchases of U.S. financial assets per quarter caused 4.23% increase in the S&P-500 index. |
