FEDERAL BUDGET DEFICITS, MONEY, AND EXCHANGE RATES
CHARLES E. HEGJI
The dollar's strength during the 1980s appears to many-particularly as reported in the financial press-to have been directly linked to the decade's large budget deficits and the subsequent increase in the stock of federal debt outstanding. The popular argument is that the budget deficit and the growth of federal government credit market demand caused U.S. interest rates to rise over that period, inducing large capital inflows from abroad to finance the deficit. According to the argument, the capital inflows caused the dollar to appreciate. Despite the argument's popularity, the empirical literature does not strongly support it. Evidence on the relationship between the federal deficit and the dollar is at best mixed. Copyright 1992 Western Economic Association International.
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