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THE INFLUENCE OF THE TRADE BALANCE AND EXPORT FINANCING ON INTERNATIONAL SHORT‐TERM CAPITAL MOVEMENTS: A THEORETICAL ANALYSIS
Author(s) -
Willett Thomas D.
Publication year - 1969
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.1467-6435.1969.tb02535.x
Subject(s) - economics , portfolio , repatriation , stock (firearms) , capital (architecture) , capital outflow , monetary economics , financial capital , international economics , financial economics , capital formation , market economy , human capital , archaeology , mechanical engineering , engineering , history
SUMMARY The relationships between international trade and short‐term capital placements are shown to be more numerous and complex than is often recognized in the literature. At first instance the trade balance determines a flow of private capital but these flows do not represent movements to equilibrium positions. At least partial repatriation of such flows will be desired by traders but the speed of this repatriation is constrained by the terms on which trade finance has been extended. With full repatriation, a ‘permanent’ change in the trade balance would not lead to a permanent change in private capital flows, but rather to a change in the net stock of short‐term assets held abroad due to these constraints on instantaneous portfolio adjustment by traders. The size of the change in this stock is shown to depend on the terms on which trade is financed as well as on the size of the change in the trade balance. The time path of the permanent outward shift is dependent upon these terms as well. The effects just summarized depend upon a divergence between traders’ actual and desired portfolio allocations because of temporary constraints on portfolio adjustment. Longer run changes in the trade balance and absolute volume of trade will affect traders’ convenience and hedging returns from holdings of foreign balances and hence may affect their desired portfolio allocations. While these effects could conceptually go in cither direction, the secular expansion of trade should level to a short‐term capital inflow into the United States because of the international role of the dollar.