Fiscal Foresight, Forecast Revisions and the Effects of Government Spending in the Open Economy

Luca Gambetti

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: This paper investigates the effects of government spending on the real exchange rate and the trade balance in the US using a new VAR identification procedure based on spending forecast revisions. I find that the real exchange rate appreciates and the trade balance deteriorates after a government spending shock, although the effects are quantitatively small. The findings broadly match the theoretical predictions of the standard Mundell-Fleming model and differ substantially from those existing in literature. Differences are attributable to the fact that, be- cause of fiscal foresight, the government spending is non-fundamental for the variables typically used in open economy VARs. Here, on the contrary, the estimated shock is fundamental.

Keywords: VARs; fiscal policy; twin deficits; trade balance; Mundell-Fleming; forecast revisions; fiscal news; survey of professional forecasters. (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Pages: 35
Date: 2012-06-22
New Economics Papers: this item is included in nep-for, nep-opm and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Fiscal Foresight, Forecast Revisions and the Effects of Government Spending in the Open Economy (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:907.12

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