The Macroeconomic Effects of Restricting Foreign Investment in the U.S.

Abstract

During the past decade, foreign investment in the United States has increased dramatically. This increase in net capital inflows and the associated accumulation of U.S. indebtedness to foreigners have caused concern in the policy analysis community. One proposal to limit the growth of U.S. indebtedness to foreigners is to erect barriers to foreign capital inflows into the United States. Assuming that barriers were put into place that effectively limited the net flow of capital into the United States, these barriers would induce inflationary pressures in the U.S. economy and place a very heavy burden on interest-sensitive sectors of the economy such as housing. Based on simulations of the Federal Reserve Board staff's multi-country model, this article presents a quantitative assessment of the macroeconomic effects of erecting such barriers to foreign investment in the United States.