Fiscal shocks, the real exchange rate and the trade balance: some evidence for emerging economies

Marcelo Silva, Diogo Baerlocher and Veras de Paiva Fonseca Henrique
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Veras de Paiva Fonseca Henrique: Department of Economics, University of Illinois at Urbana-Champaign, 1407 W. Gregory, 214 David Kinley Hall, Urbana, IL, USA

The B.E. Journal of Macroeconomics, 2015, vol. 15, issue 2, 727-768

Abstract: This paper implements a structural vector auto regression (SVAR) analysis to investigate the impacts and importance of fiscal shocks on the dynamics of the real exchange rate and the trade balance in three emerging economies: Brazil, Chile and Mexico. We show that the effects of an unexpected increase in government spending are not uniform across countries with higher spending leading to a depreciation of the real exchange rate in Brazil and Chile, whereas in Mexico, we observe an appreciation. The trade balance deteriorates in all three countries. We also report that an unexpected increase in taxes leads to recessionary impacts and improves the trade balance. Only in Mexico is there evidence of a real exchange rate depreciation. Finally, we show that fiscal shocks account for roughly 20% of real exchange fluctuations.

Keywords: Bayesian econometrics; emerging economies; fiscal policy; real exchange rate; trade balance (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (10)

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DOI: 10.1515/bejm-2014-0018

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