International Finance Topic Index

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Data Connections and Additional Resources
10 Year Treasury Bond Yield With the increasing globalization of finance, many foreign investors look to the U.S. as a safe haven for investment. U.S. Treasury Bonds are perceived to be one of the safest investments available anywhere in the world, and are therefore included in many foreign investment portfolios. The attractiveness of U.S. securities assures a steady demand for dollars in world currency markets, and an important source of funds for U.S. business investment.

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Consumer Price Index (CPI)

If a country is experiencing an accelerating inflation rate that is considerably higher than its trading partners, then the value of that country's currency will tend to fall in world currency markets. One reason is that investors experiencing accelerating inflation will look for a safe haven for their money, and one strategy is to take their domestic savings and convert them into a foreign currency such as the U.S. dollar that is experiencing considerably lower inflation. This has recently happened in Russia. As world currency markets get flooded with the inflating currency, more and more of it must be exchanged for a given amount of foreign currency.

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Current Account The U.S. has had a deficit in its current account balance since the 1980's, primarily because of a persistently large merchandise trade deficit. In order for the balance of payments to equal zero, a deficit in the current account must be offset by a surplus in the capital account. Thus foreign purchases of U.S. assets such as stocks, bonds, and real estate must exceed U.S. purchases of foreign assets.

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Interest Rate Spread

The logic of using the interest rate spread to forecast recessions is not limited to the U.S., but in fact applies to most any market economy. For example, the following article by Frank Smets and Kostas Tsatsaronis of the Bank of International Settlements relates the forecasting capacity of the interest rate spread in the U.S. and Germany.

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Stock Prices: S&P 500

In our present globalized economy, investors search the world for stable and lucrative financial returns. Consequently an economic shock such as the Asian financial crisis in 1997 and 1998 will cause investment capital to flow away from unstable markets. To prevent capital flight, central banks may raise interest rates to compensate investors for elevated risk, but higher interest rates can trigger a recession.

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