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Board of Governors of the Federal Reserve System
06/22/2026 | Press release | Distributed by Public on 06/22/2026 09:23
Fiscal Policy, Portfolio Frictions, and International Transmission
June 2026
Fiscal Policy, Portfolio Frictions, and International Transmission
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: International Business Cycles, Fiscal Policy, Exchange Rates, Trade Balance
DOI: https://doi.org/10.17016/IFDP.2026.1439
PDF: Full Paper
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