Darden Professor’s Research Informs Presidential Economic Report

Did you know the U.S. now commands nearly half of global capital flows?

The 2025 “Economic Report of the President,” released last month, notes that the U.S. has nearly doubled its share of global capital inflows from 23% before the Covid-19 pandemic to 41% in 2022-2023, cementing its role as the world’s go-to financial broker. From foreign investors pouring billions into new semiconductor plants to Wall Street fueling global equity markets, the U.S. is where the world invests — and reaps lucrative returns.

The U.S. dollar also plays an important role on the international stage, given its status as world’s main reserve currency. The greenback is what many people, banks and businesses use to price goods and settle accounts, while nations use the dollar for trade.

Chapter 6 of the report, “America’s Role in International Capital Flows,” extensively cites the research of Francis E. Warnock, the James C. Wheat Jr. Professor of Business Administration at the University of Virginia Darden School of Business and senior research advisor at the Federal Reserve Board's International Finance Division. Warnock is also a research associate at the National Bureau of Economic Research.

“The U.S. is increasingly the world's brokerage,” the report states, citing Warnock’s recent working paper, co-authored with Alexandra Tabova of the Federal Reserve Board.

The report draws on four additional papers co-authored by Warnock to support its key themes.

The U.S. as a Financial Intermediary

International capital flows play a crucial role in the global economy, just as supply chains do for the trade of goods. These financial movements allow money to cross borders, helping fund investment opportunities worldwide. The U.S. is a key player in this system, both as a sender and receiver of international funds. American investors buy foreign assets such as stocks, while foreign investors help finance U.S. projects, such as semiconductor manufacturing plants.

With its deep and liquid financial markets, the U.S. remains a primary destination for global investment. Foreign investors, including central banks and institutional investors, hold significant U.S. assets, particularly Treasury bonds and stocks. This position allows the U.S. to act as a broker between global capital suppliers and investment opportunities.

While foreign investors have long viewed American debt as safe investments, they increasingly see U.S. equity markets as attractive investment destinations. This shift reflects the dynamism and growth of American companies, which make their stocks lucrative investment opportunities.

The report finds that “a variety of motivations — ranging from seeking high returns that accompany economic growth investing in U.S. assets for precautionary or safety reasons, drive international flows into the country” and that the U.S. remains a safe haven for investors worldwide, as evidenced by the demand for U.S. Treasuries. Also, the U.S. dollar’s role as the world’s dominant reserve currency remains intact.

Academic Contributions to Understanding Capital Flows

Warnock’s research informs several key themes discussed in the report:

1. Cross-border Return Differentials and ‘Exorbitant Privilege’: One aspect of the U.S. ‘exorbitant privilege’ is the notion that the U.S. has a very positive returns differential vis-à-vis the rest of the world: that U.S. investors earn far more on their foreign portfolios than foreigners earn on their U.S. securities holdings. If true, the U.S. international budget constraint would be relaxed, providing more room to run large trade deficits. Alas, it isn’t true. Warnock is co-author of “Cross-Border Returns Differentials” published in The Quarterly Journal of Economics, which showed that U.S. privilege is not exorbitant but quite small; “On Returns Differentials” published in Journal of International Money and Finance, which summarized the first three waves of the literature on returns differentials to show exactly how top researchers produced incorrect estimates; and the working paper “Exorbitant Changes in Three Parts” that shows when properly measured the U.S. returns differential rounds to 0.00.

2. Capital Flow Waves: Warnock is co-author of “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment” published in Journal of International Economics, which ushered in a new era of research on sudden stops.

3. U.S. Interest Rates and Capital Flows: Warnock, along with Darden Professor of Practice Veronica Cacdac Warnock, authored “International Capital Flows and U.S. Interest Rates” published in Journal of International Money and Finance, which provided the first estimate of the effects of foreign governments’ purchases of Treasury bonds on a range of important interest rates.