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Understanding the dynamic effects of government spending on foreign trade

  • Müller, Gernot J.

Using Vector Autoregressions on U.S. time series, the present paper documents the effects of fiscal policy on foreign trade: an increase in government spending significantly depreciates the nominal exchange rate, appreciates the terms of trade and increases net exports. Exposed to the same spending shock, a New Keynesian general equilibrium model is shown to match qualitatively the response of relative prices. The response of net exports, in contrast, depends on the intra- and intertemporal elasticities of substitution and the degree of home bias in private spending. An accommodating monetary policy dampens, but does not alter the response of net exports.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 3 (April)
Pages: 345-371

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:3:p:345-371
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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