Fiscal Foresight, Forecast Revisions and the Effects of Government Spending in the Open Economy

Luca Gambetti

No 644, Working Papers from Barcelona School of Economics

Abstract: This paper investigates the effects of government spending on the real exchange rate and the trade balance in the US using a new VAR identification procedure based on spending forecast revisions. I find that the real exchange rate appreciates and the trade balance deteriorates after a government spending shock, although the effects are quantitatively small. The findings broadly match the theoretical predictions of the standard Mundell-Fleming model and differ substantially from those existing in literature. Differences are attributable to the fact that, because of fiscal foresight, the government spending is non-fundamental for the variables typically used in open economy VARs. Here, on the contrary, the estimated shock is fundamental.

Keywords: fiscal policy; twin deficits; Mundell-Fleming; VARs; trade balance; forecast revisions; fiscal news; survey of professional forecasters (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-for and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Fiscal Foresight, Forecast Revisions and the Effects of Government Spending in the Open Economy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:644

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