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Country characteristics and the effects of government consumption shocks on the current account and real exchange rate

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  • Kim, Soyoung

Abstract

This paper examines the effects of government consumption shocks on the current account and the real exchange rate, as well as the influence of various country characteristics on these effects. A dataset of 18 industrial countries is used for the analysis. Panel VAR models are estimated for the groups of countries classified by country characteristics. The primary empirical findings are as follows. First, positive government consumption shocks lead, if anything, to real exchange rate depreciation, but the direction of the current account response varies across samples. In particular, positive government consumption shocks lead to real exchange rate depreciation under a floating exchange rate regime. Second, international capital mobility has a significant impact on the effects of government consumption shocks. The depreciation of the real exchange rate and the improvement of current account are larger in countries with low international capital mobility than those with high capital mobility. Third, albeit less robust, the depreciation of the real exchange rate and the improvement of the current account are larger in countries under more flexible exchange rate regimes than those under less flexible exchange rate regimes. In addition, the current account improves more in countries with high trade openness than those with low trade openness. Standard theories do not fully explain these empirical patterns. Thus, these findings suggest a need for further theoretical development.

Suggested Citation

  • Kim, Soyoung, 2015. "Country characteristics and the effects of government consumption shocks on the current account and real exchange rate," Journal of International Economics, Elsevier, vol. 97(2), pages 436-447.
  • Handle: RePEc:eee:inecon:v:97:y:2015:i:2:p:436-447
    DOI: 10.1016/j.jinteco.2015.07.007
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    Cited by:

    1. Kim, Soyoung & Lee, Jaewoo, 2015. "Imbalances over the Pacific," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 173-185.
    2. Marie-Pierre HORY & Grégory LEVIEUGE & Daria ONORI, 2018. "Foreign currency denominated debt and the fiscal multiplier," LEO Working Papers / DR LEO 2583, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    3. Miyamoto, Wataru & Nguyen, Thuy Lan & Sheremirov, Viacheslav, 2016. "The effects of government spending on real exchange rates: evidence from military spending panel data," Working Papers 16-14, Federal Reserve Bank of Boston.
    4. repec:eee:ecmode:v:68:y:2018:i:c:p:543-554 is not listed on IDEAS
    5. Bonga-Bonga, Lumengo, 2017. "Fiscal policy, Monetary policy and External imbalances: Cross-country evidence from Africa’s three largest economies (Nigeria, South Africa and Egypt)," MPRA Paper 79490, University Library of Munich, Germany.
    6. Soyoung Kim & Kuntae Lim, 2016. "Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries," Working Papers 192016, Hong Kong Institute for Monetary Research.
    7. repec:eee:reveco:v:53:y:2018:i:c:p:57-70 is not listed on IDEAS

    More about this item

    Keywords

    Real exchange rate; Current account; Government consumption shocks; Country characteristics; VAR;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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