Premium
COMOVEMENTS OF BUDGET DEFICITS, EXCHANGE RATES, AND OUTPUTS OF TRADED AND NON‐TRADED GOODS
Author(s) -
NAKIBULLAH ASHRAF
Publication year - 1993
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1993.tb00884.x
Subject(s) - economics , budget constraint , exchange rate , government budget , monetary economics , constraint (computer aided design) , production (economics) , cash , econometrics , macroeconomics , public finance , microeconomics , mathematics , geometry
Between 1974:I‐1989:II, it appears that U.S. budget deficits and real exchange rates are correlated. This paper attempts to provide a structural explanation of these comovements in government budget deficits and exchange rates. The model expands on previous works to include fiscal policy considerations in a stochastic set‐up. It shows that within a simple two‐country cash‐in‐advance constraint model, it is possible to have a positive correlation between budget deficits and exchange rates, as well as a negative correlation between exchange rates and domestic traded goods production.