Productive Government Spending, Welfare and Exchange Rate Dynamics
AbstractThis study analyses the consequences of productive government spending on the international transmission of fiscal policy. A standard result in the new open economy macroeconomics literature is that a fiscal shock depreciates the exchange rate. I demonstrate that the response of the exchange rate depends on the productivity of government spending. If productivity is sufficiently high, a fiscal shock appreciates the exchange rate. It is also shown that the introduction of productive government spending increases both domestic and foreign welfare, when compared with the case where government spending is wasted. This is because productive government spending has a positive effect on private consumption in both countries in a two country NOEM model.
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Bibliographic InfoArticle provided by Institute of Public Finance in its journal Financial Theory and Practice.
Volume (Year): 32 (2008)
Issue (Month): 2 ()
New open economy macroeconomics; fiscal policy; international policy transmission;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F30 - International Economics - - International Finance - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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