Questioning the puzzle: fiscal policy, real exchange rate and inflation

Laurent Ferrara, Luca Metelli (metelli.luca@gmail.com), Filippo Natoli and Daniele Siena

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: The paper re-investigates the effects of government spending shocks on the real exchange rate and inflation, using US data. In opposition to some previous puzzling results, we find that an increase in government spending appreciates the real exchange rate and generates inflationary pressures. Positive spending shocks also induce a trade balance deficit and an increase in the nominal interest rate. The discrepancy with the existing literature lies in the identification of fiscal shocks: embedding a narrative instrument within a proxy-SVAR model is what makes the difference. Findings are robust and coherent with a standard open economy business cycle model. Our analysis suggests that proxy-SVAR models are more immune to structural changes in US fiscal policy.

Keywords: Fiscal shocks; real exchange rate; inflation; proxy-SVAR; narrative shocks (search for similar items in EconPapers)
JEL-codes: E62 F41 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2021-04
New Economics Papers: this item is included in nep-mac and nep-ore
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Citations: View citations in EconPapers (18)

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Journal Article: Questioning the puzzle: Fiscal policy, real exchange rate and inflation (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2021-38

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