Mr. Keynes meets the Classics: Government Spending and the Real Exchange Rate

Benjamin Born, Francesco D'Ascanio, Müller, Gernot and Johannes Pfeifer
Authors registered in the RePEc Author Service: Gernot J. Müller

No 14073, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In economies with fixed exchange rates, the adjustment to government spending shocks is asymmetric. Expansionary shocks are absorbed by the real exchange rate, contractionary shocks by output. This result emerges in a small open economy model with downward nominal wage rigidity and is supported by new empirical evidence based on panel data from different exchange-rate regimes. The exchange-rate regime, economic slack, inflation, and how spending is financed all matter for the fiscal transmission mechanism in the way predicted by the model. Estimates that fail to distinguish between the effects of positive and negative shocks are subject to a "depreciation bias".

JEL-codes: E62 F41 F44 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Mr. Keynes Meets the Classics: Government Spending and the Real Exchange Rate (2024)
Working Paper: Mr. Keynes Meets the Classics: Government Spending and the Real Exchange Rate (2021)
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