Chapter 20, Problem 14AA

To determine

To evaluate: The reasons for the foreigners purchasing United States government securities.

Explanation of Solution

International investors may choose to continue investing in the United States for many reasons, to fund the large US current account deficit. In reality, they may opt to buy U.S. portfolio investments to benefit from the highly established, liquid, and productive U.S. capital markets and good corporate governance and institutions in the U.S.

Foreigners can also invest in the U.S. to diversify risk, particularly if returns on U.S. financial markets have little connection with returns on domestic financial markets within their own country. Or investors outside the United States can bring their money here because of their strong links with the United States, through trade flows or distance-related "closeness", inexpensive as measures.

Economics Concept Introduction

Introduction: Public securities are issuances of government debt used to finance regular activities, and special infrastructure and military programmes. They promise complete redemption at the maturity of the invested principal, and also offer periodic coupons or interest payments.