Productive Government Purchases and the Real Exchange Rate
AbstractEmpirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number 2010_001.
Length: 9 p.
Date of creation: 2010
Date of revision:
Publication status: Published by:
Productive government purchases; real exchange rate;
Other versions of this item:
- Parantap Basu & Robert Kollmann, 2013. "Productive Government Purchases And The Real Exchange Rate," Manchester School, University of Manchester, vol. 81(4), pages 461-469, 07.
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-16 (All new papers)
- NEP-IFN-2010-01-16 (International Finance)
- NEP-OPM-2010-01-16 (Open Economy Macroeconomic)
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