The impossible relationship between the deficit and the exchange rate

This paper uses statistical and empirical analysis of data from the countries of the OECD to demonstrate that there is no evidence to support either the conventional or “Wall Street” view of the impact of the deficit or debt on the exchange rate. More precisely, countries with the largest budget deficits or government debt levels do not necessarily experience a depreciation of their currencies. Consequently, fiscal and monetary policy is best seen as an “art” for macroeconomic management.