Millennial Macro

In a monetary arrangement that promotes free capital mobility, capital flight causes either the FX rate to decline, interest rates to rise, a reserve drain, or some combination of all three.  Without having to resort to capital controls, if the CB decides to manage their FX rate then they essentially force the bulk of any adjustment in capital flows to fall on domestic interest rates.

CBO assumption: "When the federal government borrows, it increases the overall demand for funds, which generally raises the cost of borrowing and reduces lending to businesses and other entities; the eventual result would be a smaller stock of capital and lower output and income than would otherwise be the case, all else being equal.  The large amount of debt might restrict policymakers’ ability to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or financial crises. Continued growth in the debt might lead investors to doubt the government’s willingness or ability to pay its obligations, which would require the government to pay much higher interest rates on its borrowing." The 1980s peak in interest rates came at a time when Gov debt/GDP was below 30%!