US monetary tightening drives capital inflows through investor repatriation, not foreign Treasury demand

The paper challenges the conventional wisdom that US monetary policy tightening attracts foreign capital through purchases of US Treasuries.

Using detailed bilateral data on US foreign assets and liabilities from 1994 to 2019, the authors demonstrate that much of the observed capital inflows into the US is actually due to US investors repatriating funds from foreign equities.

This highlights significant heterogeneity between domestic and foreign investors and across asset classes.

A 100 basis-point monetary tightening leads to a cumulative repatriation of roughly $2.4 billion in foreign equities over nine months, representing about 5% of the average US foreign equity position.

This suggests balance sheet constraints bind more tightly for US investors.

Extending the analysis to Central Bank Information (CBI) shocks, which convey additional economic information, the study documents a distinct global portfolio rebalancing.

Unlike conventional tightening shocks, positive CBI shocks, by signaling strong economic perspectives, trigger a global "risk-on" adjustment.

This behavior is characterized by US investors increasing their foreign equity holdings while foreign investors simultaneously shift into US equities.

Identifying which investors adjust their portfolios is crucial for understanding how US monetary policy spills over to global financial markets and whether the global response is stabilizing or destabilizing.