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The Government Deficit and the Exchange Rate
Author(s) -
Stoker James
Publication year - 1999
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00198
Subject(s) - economics , exchange rate , currency , government (linguistics) , monetary economics , deficit spending , current account , cash , government spending , macroeconomics , debt , welfare , market economy , linguistics , philosophy
As government deficit spending declines, the question of its impact on the exchange rate is clearly relevant. Recent empirical work has been contradictory. This paper presents a two‐country cash‐in‐advance model to calculate explicitly the long‐ and short‐term effects of government deficit spending on the exchange rate. It is shown that increases in deficit spending result in a short‐term appreciation of the currency. The currency will eventually depreciate, to what degree and for how long depending on the method used to finance the deficit.