Working Paper: NBER ID: w2482
Authors: Vittorio U. Grilli
Abstract: This paper investigates the consequences of fiscal policies for the exchange rate. After developing a simple theory of how government financing policies should effect the exchange rate, we test it using data on the dollar/pound exchange rate. Previous analyses have concentrated mainly on the past-Bretton Woods flexible exchange rate system, thus ignoring potentially useful information contained In fixed exchange rate periods or in previous flexible exchange rate periods. This paper shows that it is theoretically proper and econometrically feasible to merge evidence from different nominal exchange rate systems. The gain of this procedure is that we can extend the sample period back to the 1870's. Our results suggest that permanent government expenditures are the only fiscal variables that significantly affected the dollar/pound nominal exchange rate. Budget deficits appear to be irrelevant in this respect.
Keywords: fiscal policy; exchange rate; government expenditure
JEL Codes: E62; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent government expenditures (H59) | dollar-pound exchange rate (F31) |
| British permanent government expenditure (H59) | dollar-pound exchange rate (F31) |
| Budget deficits (H62) | dollar-pound exchange rate (F31) |