U.S. international transactions in 1996

After stabilizing in 1995, the U.S. current account deficit widened in 1996 to $165 billion. The deficit increased sharply in the first three quarters of the year, but, because of strong export growth, narrowed significantly in the fourth quarter. The widening of the deficit by$17 billion was the net result of moderate-to-strong growth in all the key components of the current account: exports and imports of goods and services, income from U.S. and foreign portfolio and direct investments, and net unilateral transfers.Investments, Foreign ; International economic relations ; International trade

Interactions between Domestic and Foreign Investment

We present a model of portfolio allocation by noise traders who form incorrect expectations about the variance of the return distribution of a particular asset. We show that for many types of misperceptions, as long as such noise traders do not affect prices, they earn higher expected returns than do rational investors with similar degrees of risk aversion. Moreover, many such noise traders survive and dominate the market in terms of wealth in the long run, in the sense that the probability that noise traders will eventually have a high share of the economy's wealth is arbitrarily close to one. Noise traders come to dominate the market despite the fact that they take excessive risk that skews the distribution of their long run wealth and despite their excessive consumption. We conclude that the theoretical case against the long run viability of noise traders is by no means as clear cut as is commonly supposed.

On the inverse of the covariance matrix in portfolio analysis

The goal of this study is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. As argued below, such a specification, in terms of a few primitive constructs, provides new and illuminating expressions for such key concepts as the optimal holdings of a given risky asset and the slope of the risk-return efficiency locus faced by the individual investor. The building blocks of the inverse turn out to be the regression coefficients and residual variance optained by regressing the asset's excess return on the set of excess returns for all other risky assets.Risk

Exchange rates and foreign direct investment: a note

In "Exchange Rates and Direct Investment: An Imperfect Capital Markets Approach," Kenneth Froot and Jeremy Stein [1991] develop a new finance-based theory to answer an old question--the relationship, if any, between the flow of foreign direct investment and the exchange rate. Their theory, based on the possibility that a foreign firm's borrowing opportunities for financing a U.S. acquisition may be a function of its net worth in dollars, implies a negative relationship between a dollar appreciation and direct investment inflows into the United States. Empirically, the authors find statistically significant evidence of the implied negative relationship for quarterly and annual time series regressions, over the period 1973-88. ; The major purpose of this note is to show that this empirical support for the theory is weak. The authors' regressions show evidence of serious instability, and the significant negative relationship between direct investment inflows and the value of the dollar disappears for important subperiods of the 1973-88 period and for the sample period extended through 1991.Foreign exchange rates ; Investments, Foreign - United States

Politics, economics and investment: explaining plant and equipment spending by U.S. direct investors in Argentina, Brazil, and Mexico

Few economists or laymen would deny that political events can have an important, sometimes even overwhelming, impact on economic decisions in general, and investment decisions in particular. The first goal of this paper was to integrate a number of political and non-traditional economic variables into the standard theory of investment based on the maximization of the expected value of the firm. The second goal was to test this generalized investment theory on a particularly fertile field for gauging the interaction of political and economic factors: the plant and equipment spending of foreign manufacturing affiliates of U.S. multinationals in Argentina, Brazil, and Mexico. The results of these tests show that the generalized theory is far superior to the traditional alternatives in explaining the real investment of the sample for the 1958-89 period.Investments ; Political science ; Argentina ; Brazil ; Mexico

A substitute for the capital stock variable in investment functions

Saving and investment ; Capital

U.S. international transactions in 1989

Exports ; Investments, Foreign - United States ; International trade