IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Default on Government Debt and Exchange Rate Dynamics

  • Timo Henckel

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

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" 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.

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 269.

in new window

Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:ausm04:269
Contact details of provider: Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

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)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.