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Fiscal Policy, Portfolio Frictions, and International Transmission

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Abstract

I study the international transmission of fiscal policy and its impact on the real exchange rate (RER) and net exports. I document that periods of high government debt are strongly associated with a depreciated RER and subsequent increases in net exports. I present causal evidence that debt-financed fiscal expansions transmit primarily through deviations from uncovered interest parity, leading to a depreciated RER and increases in net exports over time. I propose a model in which portfolio rebalancing frictions drive the international transmission of fiscal policy that explains the empirical evidence, and show that this mechanism generates dynamics consistent with the RER disconnect.

Suggested Citation

  • Marcos Mac Mullen, 2026. "Fiscal Policy, Portfolio Frictions, and International Transmission," International Finance Discussion Papers 1439, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:103468
    DOI: 10.17016/IFDP.2026.1439
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F00 - International Economics - - General - - - General
    • F30 - International Economics - - International Finance - - - General
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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