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The Government Deficit and the Exchange Rate

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  • Stoker, James

Abstract

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. Copyright 1999 by Blackwell Publishing Ltd.

Suggested Citation

  • Stoker, James, 1999. "The Government Deficit and the Exchange Rate," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 753-763, November.
    • Handle: RePEc:bla:reviec:v:7:y:1999:i:4:p:753-63
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    Cited by:

    1. Diego Silveira Pacheco de Oliveira & Gabriel Caldas Montes, 2020. "Sovereign credit news and disagreement in expectations about the exchange rate: evidence from Brazil," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(3), pages 660-698, August.
    2. Jean C. Kouam & Simplice A. Asongu, 2022. "The Relevance of an Optimal Policy Mix in the CEMAC zone," Working Papers 22/098, European Xtramile Centre of African Studies (EXCAS).
    3. Munehisa Kasuya & Izumi Takagawa, 2001. "Model Uncertainty of Real Exchange Rate Forecast over Mid-term Horizons," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.

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