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Fiscal Shocks and The Real Exchange Rate

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  • Agustín S. Bénétrix and Philip R. Lane

Abstract

We estimate the impact of shocks to government spending on the real exchange rate for a panel of EMU member countries. Our key finding is that the impact differs across different types of government spending, with shocks to public investment generating a larger and more persistent impact on the real exchange rate than shocks to government consumption. Within the latter category, we also show that the impact of shocks to the wage component of government consumption is larger than for shocks to the non-wage component.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp286.

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Date of creation: 03 Mar 2009
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Handle: RePEc:iis:dispap:iiisdp286

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  1. Beetsma, Roel & Giuliodori, Massimo & Klaassen, Franc, 2005. "Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5222, C.E.P.R. Discussion Papers.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External Wealth, the Trade Balance and the Real Exchange Rate," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3153, C.E.P.R. Discussion Papers.
  3. Morten O. Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," Economics Working Papers, European University Institute ECO2007/23, European University Institute.
  4. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1998. "Understanding the effects of a shock to government purchases," Working Paper Series, Federal Reserve Bank of Chicago WP-98-7, Federal Reserve Bank of Chicago.
  5. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  6. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5212, C.E.P.R. Discussion Papers.
  7. Fabio Canova & Evi Pappa, 2003. "Price differentials in monetary unions: The role of fiscal shocks," Economics Working Papers 923, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2005.
  8. Benjamin Born & Gernot J. Müller, 2012. "Government Spending Shocks in Quarterly and Annual Time Series," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44, pages 507-517, 03.
  9. Robert Kollmann, 2010. "Government Purchases and the Real Exchange Rate," Open Economies Review, Springer, Springer, vol. 21(1), pages 49-64, February.
  10. Carlo Favero & Francesco Giavazzi & Jacopo Perego, 2011. "Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy," Working Papers 407, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  12. Raffaela Giordano & Sandro Momigliano & Stefano Neri & Roberto Perotti, 2008. "The effetcs of fiscal policy in Italy: Evidence from a VAR model," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 656, Bank of Italy, Economic Research and International Relations Area.
  13. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(6), pages 1233-1249, 09.
  14. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199245291, October.
  15. Parantap Basu & Robert Kollmann, 2010. "Productive Government Purchases and the Real Exchange Rate," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2010_001, ULB -- Universite Libre de Bruxelles.
  16. Holm-Hadulla, Fédéric & Kamath, Kishore & Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2010. "Public wages in the euro area - towards securing stability and competitiveness," Occasional Paper Series 112, European Central Bank.
  17. Evi Pappa, 2005. "New Keynesian or RBC Transmission? The Effects of Fiscal Policy in Labor Markets," Working Papers 293, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  18. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  19. Ravn, Morten O. & Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "Consumption, government spending, and the real exchange rate," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(3), pages 215-234.
  20. Enders, Zeno & Müller, Gernot J. & Scholl, Almuth, 2011. "How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States," Journal of International Economics, Elsevier, vol. 83(1), pages 53-69, January.
  21. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Salotti, Simone & Marattin, Luigi, 2009. "On the usefulness of government spending in the EU area," MPRA Paper 19171, University Library of Munich, Germany.
  2. Benjamin Born & Gernot J. Müller, 2009. "Government Spending Shocks in Quarterly and Annual U.S. Time-Series," Bonn Econ Discussion Papers, University of Bonn, Germany bgse16_2009, University of Bonn, Germany.
  3. Gernot Müller & André Meier & Giancarlo Corsetti, 2012. "What Determines Government Spending Multipliers?," IMF Working Papers 12/150, International Monetary Fund.
  4. Luca Gambetti, 2012. "Fiscal Foresight, Forecast Revisions and the Effects of Government Spending in the Open Economy," Working Papers 644, Barcelona Graduate School of Economics.
  5. L. Marattin & S. Salotti, 2009. "The Response of Private Consumption to Different Public Spending Categories: VAR Evidence from UK," Working Papers 670, Dipartimento Scienze Economiche, Universita' di Bologna.
  6. Francisco de Castro & Laura Fernández, 2013. "The Effects Of Fiscal Shocks On The Exchange Rate In Spain," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 44(2), pages 151-180.
  7. Agustín S. Bénétrix and Philip R. Lane, 2009. "The Impact of Fiscal Shocks on the Irish Economy," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp281, IIIS.
  8. Christie Smith, 2011. "Conference summary: New Zealand's macroeconomic imbalances -- causes and remedies," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 74, pages 5-10, September.
  9. Philip R. Lane, 2011. "External Imbalances and Macroeconomic Policy in New Zealand," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp376, IIIS.
  10. Agustin S. Benetrix & Philip R. Lane, 2009. "Fiscal Shocks and The Sectoral Composition of Output," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp294, IIIS.
  11. Philip Lane, 2010. "External Imbalances and Fiscal Policy," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp314, IIIS.
  12. Pieroni, Luca & Lorusso, Marco, 2013. "The Role of Fiscal Policy Components in Private Consumption: a Re-examination of the Effects of Military and Civilian Spending," MPRA Paper 47878, University Library of Munich, Germany.

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