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

Laurent Ferrara, Luca Metelli (), Filippo Natoli and Daniele Siena

Journal of International Economics, 2021, vol. 133, issue C

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)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199621001045
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Questioning the puzzle: fiscal policy, real exchange rate and inflation (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:133:y:2021:i:c:s0022199621001045

DOI: 10.1016/j.jinteco.2021.103524

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().