Foreign government debt depreciates domestic currency, say EconPol researchers
A change in US monetary policy could impact global exchange rates High stocks of government debt denominated in foreign currency may depreciate domestic currency, according to new research from EconPol Europe. And, say authors of the report, the prospect of a change in monetary policy in the United States could have a significant impact on global exchange rate regimes. In an analysis of the international transmission of interest rates, researchers found significant spillovers from the U.S. interest rates to other countries, mostly for advanced economies. A dampening effect of the share of external liabilities in the domestic currency was also found, which researchers flag as a clear determinant of risk premium. “The prospect of a change in monetary policy in the United States matters for other countries, and this may be true whatever their exchange rate regime,” says co-author António Afonso of REM Lisbon. The findings, he adds, are particularly important for countries with high foreign reserves. “In our paper, we focus on the role of government debt and international reserves,” explains Afonso. “The level of government indebtedness has two opposite effects on domestic long-term interest rates. It has a positive effect since it influences risk premiums and sovereign bond yields typically upwards, and
