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Questioning the puzzle: Fiscal policy, exchange rate and inflation

Laurent Ferrara (), Luca Metelli (), Filippo Natoli () and Daniele Siena ()

Working papers from Banque de France

Abstract: The paper re-investigates the effects of government spending shocks on the real exchange rate and inflation. In contrast with some previous puzzling results, we find that an increase in government spending appreciates the real exchange rate and is inflationary; besides, it induces a trade balance deficit and a decrease in consumption. The discrepancy with the existing literature lies in the identification of fiscal shocks: embedding a narrative approach in a proxy-SVAR is what makes the difference. Empirical findings are then well explained by a standard estimated open real business cycle model.

Keywords: : Fiscal Shocks; Real Exchange Rate; Inflation; Proxy SVAR; Narrative Shocks. (search for similar items in EconPapers)
JEL-codes: E62 F41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ore
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