Fiscal Shocks and the Exchange Rate in a Generalized Redux Model

Giorgio Di Giorgio, Salvatore Nisticò and Guido Traficante

Economic Notes, 2015, vol. 44, issue 3, 419-436

Abstract: type="main" xml:lang="en">

This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange-rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff ( ). We show that the joint presence of home bias in public consumption and endogenous monetary policy overturns the result of the Redux model implying an exchange-rate appreciation in response to an expansionary fiscal shock.

Date: 2015
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