IDEAS home Printed from https://ideas.repec.org/p/ecm/ausm04/269.html
   My bibliography  Save this paper

Default on Government Debt and Exchange Rate Dynamics

Author

Listed:
  • Timo Henckel

Abstract

This paper investigates how government debt affects exchange rate behavior. In a two-country general-equilibrium setting, it shows 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 is that a mean-preserving increase in the variance of future fiscal policy affects current consumption, prices, current accounts, and the exchange rate immediately. In other words, not only first moments of future policy are important, but second moments too. As a subplot, the paper briefly discusses the fiscal theory of the price level and provides some examples to disprove this flawed theory

Suggested Citation

  • Timo Henckel, 2004. "Default on Government Debt and Exchange Rate Dynamics," Econometric Society 2004 Australasian Meetings 269, Econometric Society.
  • Handle: RePEc:ecm:ausm04:269
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cecilia Maigua & Gekara Mouni, 2016. "Influence of Interest Rates Determinants on the Performance of Commercial Banks in Kenya," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 121-133, April.

    More about this item

    Keywords

    debt; exchange rates; default; fiscal policy;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:ausm04:269. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.