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The effects of fiscal shocks on the exchange rate in Spain

Francisco de Castro Fernández () and Laura Fernández-Caballero ()
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Laura Fernández-Caballero: Banco de España

No 1121, Working Papers from Banco de España, Working Papers Homepage

Abstract: We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the “twin deficits” hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.

Keywords: SVAR; Fiscal shocks; Effective exchange rates; Twin deficits; Fiscal multipliers (search for similar items in EconPapers)
JEL-codes: E62 H30 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Related works:
Journal Article: THE EFFECTS OF FISCAL SHOCKS ON THE EXCHANGE RATE IN SPAIN (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1121

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