From the Balance of Payments identity, we have that:

$$ CAB+FI=\triangle RES $$ Or that, the current account deficit is financed by either capital inflows, or a change in reserves. My question is this- say a country does not export anything, but imports one unit. This has to come from somewhere- it uses its money to exchange for another country's currency (or uses its reserves from the past of currency to pay for it). Now, the other country can either hold the country in question's money in its own reserves, or it can buy a domestic bond. This would then be represented by the financial inflow term. Is this reasoning correct? Where is the role of foreign denominated debt then?


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