Template-type: ReDIF-Paper 1.0
Author-Name: Federico Favaretto 
Title: Exchange Rates and Government Debt
Abstract: This paper studies how government debt variables impact estimates of the classic and new UIP puzzles for quarterly data between 2000 and 2020 of 6 developed countries in relation to the United States. I estimate country-pair VECMs to model cointegration relations between debt variables, price differences, interest rates differences and nominal exchange rate.
I compare this framework with one without debt variables following Engel (2016) using quarterly data between 1979 and 2020. In the framework without debt, I don't find the new UIP puzzle while in the framework with debt, I do find it.
Government debt variables are significant and alter the sign of comovements between difference in interest rates and far-ahead ex-post and ex-ante excess currency returns. The magnitude of the effect is economically relevant. Government debts coffcients cannot be uniquely associated with convenience yield story.
Classification-JEL:  E42; E60; F31.
Keywords: Exchange Rates; Government Debt; UIP puzzle; Excess Currency Returns.
Length: 86
Number: 23198
Creation-Date: 2023
File-URL: https://repec.unibocconi.it/baffic/baf/papers/cbafwp23198.pdf
File-Format: application/pdf
File-Size: 474
Handle: RePEc:baf:cbafwp:cbafwp23198