The U.S. Budget Deficit and the Foreign Exchange Value of the Dollar

Michael Melvin, Don Schlagenhauf and Ayhan Talu

The Review of Economics and Statistics, 1989, vol. 71, issue 3, 500-505

Abstract: This paper presents and estimates a simple model of real exchange rate determination that includes the expected future U.S. federal budget deficit as a determinant. The model is applied to the real value of the dollar versus the mark, yen, and pound over the period June 1974-October 1987. The estimates suggest that rapid increases in the expected future deficit in the early 1980s contributed to a rapid appreciation of the dollar. The fall in the value of the dollar in the spring of 1985 appears to be due to a fall in the expected budget deficit. Copyright 1989 by MIT Press.

Date: 1989
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