Government spending and the exchange rate

Giorgio Di Giorgio, Salvatore Nisticò and Guido Traficante

No 4/15, Working Papers from Sapienza University of Rome, DISS

Abstract: Contrary to widespread empirical evidence, standard NOEM models imply that the real exchange rate appreciates following an increase in public spending. This paper uses a two-country \perpetual youth" DSGE model with productive government purchases to show to what extent the real exchange rate can instead depreciate after a positive spending shock, thus reconciling the theoretical model with the empirical evidence. In particular, the model is able to imply a depreciation both on impact and in the transition, displaying the hump-shaped response documented by most empirical studies. The transmission mechanism of fiscal shocks works through an increase in domestic private sector productivity and, in turn, lower real marginal costs at Home.

Keywords: Exchange Rate; Fiscal Shocks; Endogenous Monetary and Fiscal Policy. (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 F42 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Government spending and the exchange rate (2018)
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