The effects of Foreign Investment shocks on the US economic growth and risk factors

Golnaz Baradaran Motie and Zheng Zeng

Applied Economics Letters, 2025, vol. 32, issue 9, 1215-1220

Abstract: We examine the effects of shocks to Total Foreign Investment (TFI) and its components, Foreign Portfolio Investment (FPI), Foreign Direct Investment (FDI), and Bank Credit (BC) on the US economic growth and risk factors by estimating a series of Dynamic Factor Models. We extract comovements from 31 indicators to capture composite indices of output, monetary, and credit risk conditions that measure the US market conditions. We find that positive shocks to TFI, FPI, and FDI increase the real economic activity and lower the aggregate risks in the US. We also find that a shock to FPI results in the largest impacts on output and risk factors as well as their associated indicators, followed by shocks to TFI and FDI, respectively. Furthermore, we find that FPI shocks contribute the most to the historical fluctuations of output, monetary, and risk indicators.

Date: 2025
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DOI: 10.1080/13504851.2024.2302879

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