Economics, Econometrics and Finance
3 years ago

Fiscal shocks drive real exchange rates in developed countries.

Review of Financial Studies
Fiscal Cyclicality and Currency Risk Premia
Zhengyang Jiang

Paper Summary

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The model in the article shows that changes in government spending affect the value of a country's money. When governments spend more than they earn, the value of their money goes down. This can cause the exchange rate to change. The study found that these changes in government spending can explain why exchange rates move, and that the patterns in government spending also match the patterns in currency returns.