International Capital Markets and the Limits of National Economic Policy

Abstract

In recent decades, there has been a notable significant increase in international capital mobility and this has furthered a conceptual revolution in macroeconomic theory that involves how international demand and supply determine a nation's supply of investment credit. Competition thus drives domestic economies to adjust rapidly to the uniform interest rate across the world. This perspective poses several challenges to various tenets of traditional economic policy, particularly to the notion that concerns how market clearing entails the equality between investment and domestic savings. Open-economy macroeconomics reveals that economic policies that are aimed at modifying domestic saving are not capable of altering the real rate of interest, the cost of capital, as well as the supply of domestic credit.

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