Macroeconomic Effects of International Capital Flows: Lessons from Japan’s Foreign Reserve Investment

The large increases in foreign capital flows into the U.S. caused by foreign central banks or oil-exporting countries have stimulated research as to their effect on U.S. interest rates. My thesis seeks to shed light on this topic by examining the relationship between Japan’s foreign reserve investment, which was propelled by its world record intervention, and U.S. interest rates. Additionally, I calculate the macroeconomic effects on the global economy due to the declines in U.S. interest rates caused by Japan’s foreign reserve investment. This research provides important lessons for understanding the current global economy, where large capital flows from China and oil-exporting countries influence macroeconomic variables through changes in asset prices.