Working Paper

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.

JEL Classification: E62; F00; F30; F44; F31;

https://doi.org/10.17016/IFDP.2026.1439

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2026-06-22

Number: 1439