The Impact of Net International Capital Inflows on Nominal Long-Term Interest Rates in France

Previous research on the impact of net international capital inflows on domestic interest rates has been exclusively founded in regression analysis and has yield mixed results. Some studies find that net capital inflows reduce domestic interest rates, whereas others find no such impact. The present study, which applies cointegration techniques to quarterly data over the 1973-93 period, finds that such capital inflows to a major industrialized nation, France, may not only reduce longer term interest rates in that nation but may also offset a large portion of the longer term interest rate impact of that nation's government budget deficit.