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Buoyant Capital Spending and Worries Over Real Appreciation

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  • Oumar Diallo
  • Boileau Loko
  • Kangni Kpodar

Abstract

The Government of Algeria has pursed a relatively expansionary fiscal policy in recent years, thanks to rising oil prices and revenues. The paper explores the potential effects of such a stance on real exchange rate and uncovers a relatively small appreciating effect of increased government capital expenditure. This is explained by the fact that a significant share of capital spending falls into tradable imported goods. However, the envisaged increase in capital spending, if well designed and implemented, might in the long-run translate into rising operations and maintenance expenditure-mostly nontradable goods-thereby causing a higher real appreciation. This implies that Algeria should carefully consider the implications of its public investment program on recurrent expenditure.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/286.

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Length: 21
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/286

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Keywords: Oil; Government expenditures; Real effective exchange rates; exchange rate; real exchange rate; government spending; public spending; capital expenditure; real effective exchange rate; effective exchange rate; fiscal policy; aggregate demand; real exchange rate appreciation; increase in capital spending; exchange rate appreciation; exchange rates; public expenditure; government expenditure; fiscal sustainability; expansionary fiscal; government revenue; foreign exchange; expansionary fiscal policy; composition of government expenditure; fiscal expansion; fiscal deficits; nominal exchange rate; fiscal resources; expenditure programs; equilibrium exchange rate; additional fiscal resources; exchange rate determination; real exchange rates; level of public spending; fiscal stance; exchange rate regime; fiscal space; exchange rate information; share of public spending; fiscal policies; effective exchange rates; composition of public spending;

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  1. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 983-1004, October.
  2. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country," IMF Working Papers 05/135, International Monetary Fund.
  5. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
  6. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers 98/67, International Monetary Fund.
  7. Paul Cashin & Luis Felipe C├ęspedes & Ratna Sahay, 2003. "Commodity Currencies and the Real Exchange Rate," Working Papers Central Bank of Chile 236, Central Bank of Chile.
  8. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
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