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Does capital inflow lower US interest rates?
Basic textbook models, such as the Mundell-Fleming model, say that capital inflow occurs due to the domestic interest rate being higher than the world interest rate, and thus capital inflow. So according to this model, it can lower interest rates so that interest rates stabilize to the world interest rate. However, there is a checklist that needs to be ticked off and this checklist is like a chain, for example if domestic interest rates are high then there is going to be capital inflow, the domestic currency will appreciate due to the increase in demand for the currency, thus Net Exports will decrease until exchange rates have stabilized.
