Government spending, the exchange rate and growth: empirical evidence for Latin America

Moritz Cruz and Josue Zavaleta ()

Brazilian Journal of Political Economy, 2021, vol. 41, issue 4, 637-656

Abstract: Using data of selected economies of Latin America for the period 1990-2017, thispaper aims to provide empirical evidence regarding the effect of disaggregate governmentspending in the exchange rate. Our results indicate that government investment depreciatesthe exchange rate whereas government consumption, on the other hand, appreciates it. Botheffects are, however, rather small. Our findings support recent literature showing that therelationship among government spending and the exchange rate is ambiguous, challengingthe general accepted idea that government spending inevitably appreciates the exchange rate,having thus negative effects on the tradable sector and on growth. Overall, our results allowus to suggest that growth can be stimulated particularly via government investment withoutdetrimental effects on the exchange rate. JEL Classification: 011; 025; E12; E62.

Keywords: Government spending; exchange rate; industrial policy; growth and development; Latin America (search for similar items in EconPapers)
Date: 2021
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