‘Fiscal distress’ can reverse exchange rate dynamics – BIS paper

The Bank for International Settlements, Basel
The Bank for International Settlements, Basel
Photo: Ulrich Roth

The exchange rate responds differently to monetary and fiscal policy depending on whether a country is suffering “fiscal distress”, a working paper published by the Bank for International Settlements finds.

Enrique Alberola-Ila, Carlos Cantú, Paolo Cavallino and Nikola Mirkov depart from the standard literature, which assumes an “unconditional” exchange rate response. Instead, they distinguish between different fiscal regimes.

One, a “Ricardian” regime, assumes the sovereign will provide full

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