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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: F41 F42 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-opm
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18) Track citations by RSS feed

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