US Fiscal Cycle and the Dollar
34 Pages Posted: 6 Dec 2018 Last revised: 14 Feb 2020
Date Written: March 18, 2019
A stronger US fiscal condition predicts the dollar will have a higher excess return against foreign currencies in the following year, and more so against currencies with higher dollar betas. A stronger fiscal condition in a foreign country, on the other hand, does not have such forecasting power. These results suggest that stochastic discount factors in complete market models should feature a time-varying volatility on the global risk factor to describe exchange rates, and the US fiscal cycle comoves with this volatility.
Keywords: The dollar, fiscal cycle, term structure of risk premium
JEL Classification: F31, G10
Suggested Citation: Suggested Citation