The international portfolio choice model

We apply the international portfolio choice model to the United States and the dollar. If a country’s external debt increases, at equilibrium, non-resident demand for assets denominated in that country’s currency and expressed in that currency must be equal to the country’s external debt (demand for external debt must remain equal to the supply of external debt). This can result from: An increase in the international reserve currency role of the country’s currency (this is no longer the case for the United States); A widening of the return differential between the country’s assets (bonds, equities, etc.) and those of the rest of the world (this is the case currently in the United States for equities and for the yield spread against the euro); A depreciation of the country’s currency, which reduces the proportion of its external debt in the wealth of the rest of the world (this is not yet the case for the United States, but was the case from 2002 to 2008).