<p>I do not believe that foreign capital investment (at least in the short-run) would <em>directly</em> increase the domestic money supply.</p>

<p>When foreign investors purchase domestic currency, the investors merely transfer that currency from domestic accounts to their own accounts. Then, when the investors purchase capital in the domestic market, the purchased currency is transferred back to the domestic sellers. Thus I do not see how net circulation of domestic currency rises in the event of a capital inflow directly.</p>

<p>There are, of course, more complicated <em>indirect</em> effects such as domestic banks issuing an increased number of loans based off new demand deposits that may increase the money supply, but the direct effect that I believe you're alluding to isn't there. As you say, the domestic money supply cannot be increased without <strong>banks</strong> playing a role in fueling domestic credit.</p>

CC BY-SA 4.0
2018-10-13T21:30:06.283Z
2018-10-14T02:47:05.000Z
2018-10-14T02:47:05.000Z
Kenneth Rios
<p>I have a super basic question on international macro.
I read that an increase in the capital inflows (say because of favorable macro enviroment) can increase the domestic money supply. However, it is only the central bank that can engineer an increase in the money supply. How would this look like in practice? </p>

<p>Thanks!</p>

<banking>
Money supply and Capital Flows
ChinG
# Money supply and Capital Flows

(Asked by: username_0 on 2018-10-13)

I have a super basic question on international macro.
I read that an increase in the capital inflows (say because of favorable macro enviroment) can increase the domestic money supply. However, it is only the central bank that can engineer an increase in the money supply. How would this look like in practice?

Thanks!

**Tags:** banking

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## 1 answers

### Answer by username_1 on 2018-10-13. Score: 1 | Accepted answer

I do not believe that foreign capital investment (at least in the short-run) would *directly* increase the domestic money supply.

When foreign investors purchase domestic currency, the investors merely transfer that currency from domestic accounts to their own accounts. Then, when the investors purchase capital in the domestic market, the purchased currency is transferred back to the domestic sellers. Thus I do not see how net circulation of domestic currency rises in the event of a capital inflow directly.

There are, of course, more complicated *indirect* effects such as domestic banks issuing an increased number of loans based off new demand deposits that may increase the money supply, but the direct effect that I believe you're alluding to isn't there. As you say, the domestic money supply cannot be increased without **banks** playing a role in fueling domestic credit.


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