Investigation of Global Imbalances Based on a Gravity Model

Abstract

Using the US Treasury International Capital (TIC) data, this paper attempts to analyze the size and trend of foreign investment in the U.S. in the form of equities, bonds and bank lending during the period of 2001-2007. In addition, this paper assesses the determinants of foreign investment in the U.S., using the financial gravity model which includes an East Asian dummy as an explanatory variable. The results show that most East Asian countries have invested more in the U.S. than the optimal level suggested by the gravity model. Such an over-investment is more evident in long-term bond investment than in equity investment or bank lending. Thus, the results confirm that global imbalance does exist between East Asian countries and the U.S.