Summary: The real effective exchange rate of the dollar is close to its minimum level for the past 4decades (as of September 2008). At the same time, however, the U.S. trade and current account deficits remain large and, absent a significant correction in coming years, wouldcontribute to a further accumulation of U.S. external liabilities. The paper discusses the tension between these two aspects of the dollar assessment, and what factors can help reconcile them. It focuses in particular on the terms of trade, adjustment lags, and measurement issues related to both the real effective exchange rate and the current account balance.
Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets
Summary: Using a panel of 30 emerging market economies from 1997 to 2007, this paper investigates the determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both fiscal and political factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, while efforts at fiscal consolidation narrow credit spreads, especially in countries that experienced prior defaults. The composition of fiscal policy matters: spending on public investment contributes to lower spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen