Fiscal Policy, Portfolio Frictions, and International Transmission

Marcos Mac Mullen
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Marcos Mac Mullen: https://www.federalreserve.gov/econres/marcos-mac-mullen.htm

No 1439, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: exchange rates; fiscal policy; international finance; current accounts (search for similar items in EconPapers)
JEL-codes: E62 F00 F30 F31 F44 (search for similar items in EconPapers)
Pages: 133 p.
Date: 2026-06-22
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:103468

DOI: 10.17016/IFDP.2026.1439

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