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    International Country Risk: An Overview of Financial Management and The Financial Environment

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    The document discusses how the large US trade deficit hinders the Federal Reserve's ability to combat recessions by lowering interest rates, as the US has become heavily reliant on international investors. It explains that interest rates in other countries influence US rates, with higher foreign rates leading to higher domestic rates. International risk factors may also increase the cost of money invested abroad due to country-specific risks.

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    International Country Risk: An Overview of Financial Management and The Financial Environment

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    The document discusses how the large US trade deficit hinders the Federal Reserve's ability to combat recessions by lowering interest rates, as the US has become heavily reliant on international investors. It explains that interest rates in other countries influence US rates, with higher foreign rates leading to higher domestic rates. International risk factors may also increase the cost of money invested abroad due to country-specific risks.

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    The document discusses how the large US trade deficit hinders the Federal Reserve's ability to combat recessions by lowering interest rates, as the US has become heavily reliant on international investors. It explains that interest rates in other countries influence US rates, with higher foreign rates leading to higher domestic rates. International risk factors may also increase the cost of money invested abroad due to country-specific risks.

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    International Country Risk: An Overview of Financial Management and The Financial Environment

    Uploaded by

    adrien_ducaillou
    The document discusses how the large US trade deficit hinders the Federal Reserve's ability to combat recessions by lowering interest rates, as the US has become heavily reliant on international investors. It explains that interest rates in other countries influence US rates, with higher foreign rates leading to higher domestic rates. International risk factors may also increase the cost of money invested abroad due to country-specific risks.

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    18 Chapter 1 An Overview of Financial Management and the Financial Environment

    must borrow, and as we increase our borrowing, this drives up interest rates. Also, international investors are willing to hold U.S. debt if and only if the rate paid on this debt is competitive with interest rates in other countries. Therefore, if the Federal Reserve attempts to lower interest rates in the United States, causing our rates to fall below rates abroad (after adjustments for expected changes in the exchange rate), then international investors will sell U.S. bonds, which will depress bond prices and result in higher U.S. rates. Thus, if the trade deficit is large relative to the size of the overall economy, it will hinder the Feds ability to combat a recession by lowering interest rates. The United States has been running annual trade deficits since the mid-1970s, and the cumulative effect of these deficits is that the United States has become the largest debtor nation of all time. As a result, our interest rates are very much influenced by interest rates in other countries around the world: Higher rates abroad lead to higher U.S. rates, and vice versa. Because of all this, U.S. corporate treasurersand anyone else who is affected by interest rates must keep up with developments in the world economy. International Country Risk International risk factors may increase the cost of money that is invested abroad. Country risk is the risk that arises from investing
    Interest Rates Inflation Interest Rate (%)
    16 14 12 10 8 6 4 2 0 16 14 12 10 8 6 4 2 0

    1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

    Business Activity, Interest Rates, and Inflation


    Figure 1-2
    Notes: aThe shaded areas designate business recessions as defined by the National Bureau of Economic Research; see http://www.nber.org/cycles. Tick marks represent the beginning of the year. bInterest rates are for AAA corporate bonds; see the St. Louis Federal Reserve Web site known as FRED: http://research.stlouisfed.org /fred/. cInflation is measured by the annual rate of change for the Consumer Price Index (CPI); see http://research.stlouisfed.org/fred/.

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