Effects of Fiscal Shocks in a Globalized World

Alan Auerbach and Yuriy Gorodnichenko

IMF Economic Review, 2016, vol. 64, issue 1, 177-215

Abstract: Although theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have regularly found depreciation. Using daily data on U.S. defense spending (announced and actual payments), the paper documents that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. It examines the responses of other variables at the daily frequency and explores how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times.

Date: 2016
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