Teaching International Trade and Finance Using Computer Spreadsheets
In: The American economist: journal of the International Honor Society in Economics, Omicron Delta Epsilon, Band 44, Heft 2, S. 46-50
ISSN: 2328-1235
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In: The American economist: journal of the International Honor Society in Economics, Omicron Delta Epsilon, Band 44, Heft 2, S. 46-50
ISSN: 2328-1235
In: Contemporary economic policy: a journal of Western Economic Association International, Band 10, Heft 1, S. 81-90
ISSN: 1465-7287
The dollar's strength during the 1980s appears to many—particularly as reported in the financial press—to have been directly linked to the decade's large budget deficits and the subsequent increase in the stock of federal debt outstanding. The popular argument is that the budget deficit and the growth of federal government credit market demand caused U.S. interest rates to rise over that period, inducing large capital inflows from abroad to finance the deficit. According to the argument, the capital inflows caused the dollar to appreciate. Despite the argument's popularity, the empirical literature does not strongly support it. Evidence on the relationship between the federal deficit and the dollar is at best mixed.This article reconsiders the effects of federal budget deficits on the exchange rate. The analysis involves estimating a vector autoregressive (VAR) model of exchange rates that includes monetary, fiscal, and price level variables. Within the VAR framework, impulse analysis traces the dynamic response of exchange rates to various budget deficit measures.The analysis finds that deficits do not directly Granger cause exchange rates, but it also finds evidence of an indirect effect working through the money supply and price level. Moreover, the analysis reveals some evidence that foreign exchange markets are forward looking and react to expected budget deficits. The innovations accounting and impulse analysis also suggest a forward‐looking dynamic relationship between deficits and exchange rates, but the relationship is sensitive to the ordering of the variables.
In: Journal of economics and business, Band 41, Heft 2, S. 171-183
ISSN: 0148-6195