Cost of capital for industry and banks

*Robert N. McCauley is Research Officer and Senior Economist, International Finance Department, and Steven A. Zimmer is Senior Economist, International Capital Markets staff, Federal Reserve Bank of New York.
1 See footnote at end of text.
A relatively high cost of capital burdens U.S. industry and banks alike. The effects of high capital costs on capital formation in the United States are hard to demonstrate, but are believed to be important, especially in research-intensive high technology industries. The inflow of foreign direct investment into the United States in the late 1970s and the 1980s fits with a cost-of-capital interpretation. Cost-of-capital differences assert themselves with particular force in competition in wholesale banking. How foreign banks will respond to the effect Of recession on the cash flows of U. S. corporations is important, because a high cost of capital has shrunk U.S. banks' market share.