Abstract
This paper investigates how government debt affects exchange rate behavior. In a simple two-country general-equilibrium setting, it argues that the exchange rate is directly related to the effective price of public debt. Changes in the present value of the stream of future surpluses alter the expected returns and market value of securities. If the price of securities is fixed in terms of money, the private sector will attempt to rebalance its portfolio in favor of safe (foreign) securities. However, when prices are sticky part of the adjustment must come through the exchange rate. A key result from this section is that a mean-preserving increase in the variance of future fiscal policy affects current consumption, prices, current accounts, and the exchange rate. As a subplot, the paper briefly discusses the fiscal theory of the price level and provides some examples which should help to put this flawed theory to rest.
| Original language | English |
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| Number of pages | 36 |
| Publication status | Published - 2004 |
| Event | 9th Australasian Macroeconomics Workshop 2004 - Canberra, Australia Duration: 15 Apr 2004 → 16 Apr 2004 http://cama.anu.edu.au/conferencehome.htm |
Conference
| Conference | 9th Australasian Macroeconomics Workshop 2004 |
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| Country/Territory | Australia |
| City | Canberra |
| Period | 15/04/04 → 16/04/04 |
| Internet address |