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Foreign portfolio investment and the US macroeconomic conditions

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  • Motie, Golnaz Baradaran
  • Zeng, Zheng

Abstract

This paper examines how foreign portfolio investment (FPI) in the US and its components affect the US macroeconomic conditions. We estimate a Dynamic Factor Model to extract comovements from 31 indicators to obtain three composite measures of the US macroeconomic conditions, which correspond to real economic activity, monetary policy, and aggregate uncertainty. We find that an unexpected rise in FPI reduces long-term interest rates, raises real output production and employment, and lowers aggregate risks. Our results also show that the equity portion of FPI is significantly more sensitive to shocks to domestic market conditions than the debt portion of FPI. However, both components contribute substantially to the fluctuations of the US macroeconomic conditions. Finally, we find that shocks to FPI are one of the most significant contributors to the historical fluctuations in all output, monetary, and risk conditions. In particular, the equity component contributes substantially during economic recessions, while the debt component is the dominant force during economic booms.

Suggested Citation

  • Motie, Golnaz Baradaran & Zeng, Zheng, 2023. "Foreign portfolio investment and the US macroeconomic conditions," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000876
    DOI: 10.1016/j.najef.2023.101964
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    References listed on IDEAS

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    1. Joshua Aizenman & Yothin Jinjarak & Donghyun Park, 2013. "Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990–2010," Open Economies Review, Springer, vol. 24(3), pages 371-396, July.
    2. Bahmani-Oskooee, Mohsen & Harvey, Hanafiah & Hegerty, Scott W., 2013. "The effects of exchange-rate volatility on commodity trade between the U.S. and Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 70-93.
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    More about this item

    Keywords

    Foreign portfolio investment; Debt; Equity; Dynamic factor model; VAR; Bayesian; MCMC;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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