Capital flows can be attracted by interest rates, attractive equities or the exchange rate

We illustrate our analysis with the case of the United States. When the United States has a large external deficit, which is the case today and will continue to be the case, it has to attract capital flows. This can be done in three ways: With higher short- or long-term interest rates than in other countries, which attracts short-term or bond capital flows; With attractive equity markets, which attracts equity capital flows; Via exchange rate depreciation to the point where it generates expectations of an appreciation. In the past, capital flows were attracted to the United States in the form of bond capital until 2017, quite seldom short-term capital, and in the form of equity capital in the early 2000s and since 2019. Today, it is conceivable that the yield spread in favour of the United States will remain small and that US equities will have to remain attractive to non-residents if a sharp depreciation of the dollar is to be averted.