Marcos Mac MullenI 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.
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