The Composition of Government Spending and the Real Exchange Rate

Vahagn Galstyan and Philip Lane ()

No 6903, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.

Keywords: government consumption; government investment; real exchange rate (search for similar items in EconPapers)
JEL-codes: E62 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-opm
Date: Written 2008-07

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