Productive Government Purchases and the Real Exchange Rate

Parantap Basu and Robert Kollmann ()

No 2010_001, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result.

Keywords: Productive government purchases; real exchange rate (search for similar items in EconPapers)
JEL-codes: E62 F41 F42 (search for similar items in EconPapers)
Pages: 9 p.
Date: 2010
New Economics Papers: this item is included in nep-ifn and nep-opm
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Citations: View citations in EconPapers (32)

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Journal Article: PRODUCTIVE GOVERNMENT PURCHASES AND THE REAL EXCHANGE RATE (2013)
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