Understanding the dynamic effects of government spending on foreign trade

Gernot Müller

Journal of International Money and Finance, 2008, vol. 27, issue 3, 345-371

Abstract: Using Vector Autoregressions on U.S. time series, the present paper documents the effects of fiscal policy on foreign trade: an increase in government spending significantly depreciates the nominal exchange rate, appreciates the terms of trade and increases net exports. Exposed to the same spending shock, a New Keynesian general equilibrium model is shown to match qualitatively the response of relative prices. The response of net exports, in contrast, depends on the intra- and intertemporal elasticities of substitution and the degree of home bias in private spending. An accommodating monetary policy dampens, but does not alter the response of net exports.

Date: 2008
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Working Paper: Understanding the Dynamic Effects of Government Spending on Foreign Trade (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:27:y:2008:i:3:p:345-371

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