Understanding the Dynamic Effects of Government Spending on Foreign Trade

Gernot J. Mueller
Authors registered in the RePEc Author Service: Gernot J. Müller

No ECO2004/27, Economics Working Papers from European University Institute

Abstract: In order to understand the dynamic effects of government spending on foreign trade the present paper proceeds in two steps. First, using U.S. time series data for the post-Bretton-Woods period, the dynamic effects of government spending are investigated within a structural Vector Autoregression framework: the nominal exchange rate is found to depreciate, the terms of trade to appreciate and the trade balance to increase significantly after a temporary increase in government spending. In a second step, a New-Keynesian general equilibrium model is used to rationalize these effects. Two findings emerge: i) a low elasticity of substitution between home and foreign goods is necessary for the trade balance to improve after an increase in public spending. ii) an accommodating monetary policy is found to dampen the effects of government spending on foreign trade.

Keywords: Government Spending; Exchange Rate; Trade Balance; Terms of Trade; Policy Interaction (search for similar items in EconPapers)
JEL-codes: E62 F41 F42 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-int and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Understanding the dynamic effects of government spending on foreign trade (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2004/27

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