The effects of fiscal shocks on the exchange rate in Spain
AbstractWe analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the “twin deficits” hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.
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Bibliographic InfoPaper provided by Banco de EspaÃ±a in its series Banco de EspaÃ±a Working Papers with number 1121.
Length: 34 pages
Date of creation: Oct 2011
Date of revision:
SVAR; Fiscal shocks; Effective exchange rates; Twin deficits; Fiscal multipliers;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-16 (All new papers)
- NEP-CBA-2011-09-16 (Central Banking)
- NEP-MAC-2011-09-16 (Macroeconomics)
- NEP-OPM-2011-09-16 (Open Economy Macroeconomic)
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- Francisco de Castro & Daniel Garrote, 2012. "The effects of fiscal shocks on the exchange rate in the EMU and differences with the us," Banco de EspaÃÂ±a Working Papers 1224, Banco de EspaÃ±a.
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