Exchange Rates and Government Debt

Federico Favaretto

No 23198, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: This paper studies how government debt variables impact estimates of the classic and new UIP puzzles for quarterly data between 2000 and 2020 of 6 developed countries in relation to the United States. I estimate country-pair VECMs to model cointegration relations between debt variables, price differences, interest rates differences and nominal exchange rate. I compare this framework with one without debt variables following Engel (2016) using quarterly data between 1979 and 2020. In the framework without debt, I don't find the new UIP puzzle while in the framework with debt, I do find it. Government debt variables are significant and alter the sign of comovements between difference in interest rates and far-ahead ex-post and ex-ante excess currency returns. The magnitude of the effect is economically relevant. Government debts coffcients cannot be uniquely associated with convenience yield story.

Keywords: Exchange Rates; Government Debt; UIP puzzle; Excess Currency Returns. (search for similar items in EconPapers)
JEL-codes: E42 E60 F31 (search for similar items in EconPapers)
Pages: 86
Date: 2023
New Economics Papers: this item is included in nep-opm
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