Regional heterogeneity in the relationship between fiscal imbalances and foreign exchange market pressure

Abstract

Summary The relationship between fiscal imbalances and other macroeconomic variables is complex and multifaceted. However, it remains important to understand it, not least in order to facilitate the design of appropriate policy. One central issue is whether the relationship varies across countries or groups of countries. If it does, an implication is that policy will also have to be differentiated. This paper empirically explores the relationship between fiscal imbalances and pressures in the foreign exchange (FX) market in Latin America & Caribbean (LAC) and East Asia & the Pacific (EAP) regions. Using panel data over 1970–2000, it finds that fiscal imbalances have a significant effect on FX pressures in LAC but not in EAP.