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I am trying to figure out the effect on GDP of foreigners buying lots of domestic bonds. From what I understand, when foreigners buy lots of domestic bonds:

  • They need to convert their foreign currency into the domestic currency. This increases the demand for the domestic currency, leading to appreciation of the domestic currency. This appreciation of the currency makes domestically produced goods more expensive to foreigners, while making foreign goods cheaper. Exports fall and imports rise. Net exports fall. Therefore, GDP decreases.

  • The influx of foreign money into bonds causes bond prices to rise, and bond yields to drop. The increased demand for bonds leads to lower bond yields. As a result, domestic firms will find it easier to borrow money. This leads to an increase in investment. Therefore, GDP rises.

Is my understanding correct? What am I missing? In the real world, when foreigners buy lots of bonds, what happens to the GDP?

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For every buyer there is a seller. If a foreigner buys a bond, that means a domestic investor sells it to them (or issuer). Why should the identity of who owns the bond matter?

In practice, there are many moving parts. One feature of financial crises is that investors buy U.S. Treasury bonds as a flight to safety. This means that purchases coincide with the weakening economy created by the financial crisis.

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