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Effects of Fiscal Shocks in a Globalized World

Alan Auerbach and Yuriy Gorodnichenko

No 21100, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: While theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have been stubbornly finding depreciation. Using daily data on U.S. defense spending (announced and actual payments), we document that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. We examine responses of other variables at the daily frequency and explore how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times.

JEL-codes: E62 F41 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-lma, nep-mac and nep-opm
Note: EFG PE
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Citations: View citations in EconPapers (4)

Published as Alan J Auerbach & Yuriy Gorodnichenko, 2016. "Effects of Fiscal Shocks in a Globalized World," IMF Economic Review, Palgrave Macmillan, vol. 64(1), pages 177-215, May.

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