Soledad Arellano Felipe Larraín () (Instituto de Economía. Pontificia Universidad Católica de Chile.)
Abstract
This paper draws on the work of Rodríguez (1982, 1989, 1992) to develop a simple theoretical model whose reduced form has the real exchange rate as a function of the level, composition, and financing of public spending, the terms of trade, and the trade balance. The main purpose of this paper is, however, to study empirically this relation for Chile. Its particular focus is on the relationship between the real exchange rate and government spending. To do so, we build a new series of public spending from the figures of budget execution. This allows for a complete picture of current fiscal expenditure including not only government consumption, but also current transfers and pension outlays which account for over SO% of current spending. Other works on the subject for Chile have not included the last two items in their measure of government expenditure. The results of the long-run model indicate that an increase in government spending of 1 % of GDP produces an appreciation of the real exchange rate in the order of 3% (an elasticity of around 0.75). This effect is significantly larger than that of other investigations for Chile which have only included government consumption as their measure of current spending. Our results also indicate that fiscal policy affects the real exchange rate in the short run too.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
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