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Consumption, government spending, and the real exchange rate

  • Ravn, Morten O.
  • Schmitt-Grohé, Stephanie
  • Uribe, Martín

Using panel structural VAR analysis and quarterly data from four industrialized countries, we document that an increase in government purchases raises output and private consumption, deteriorates the trade balance, and depreciates the real exchange rate. This pattern of comovement poses a puzzle for both neoclassical and Keynesian models. An explanation based on the deep-habit mechanism is proposed. An estimated two-country model with deep-habits is shown to replicate well the observed responses of output, consumption, and the trade balance, and the initial response of the real exchange rate to an estimated government spending shock.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 3 ()
Pages: 215-234

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Handle: RePEc:eee:moneco:v:59:y:2012:i:3:p:215-234
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
  2. Morten Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Deep Habits," NBER Working Papers 10261, National Bureau of Economic Research, Inc.
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  5. Monacelli, Tommaso & Perotti, Roberto, 2008. "Fiscal Policy, Wealth Effects and Markups," CEPR Discussion Papers 7099, C.E.P.R. Discussion Papers.
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  8. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
  9. Morten O. Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," NBER Working Papers 13328, National Bureau of Economic Research, Inc.
  10. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
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  13. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
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  18. repec:eui:euiwps:eco2007/23 is not listed on IDEAS
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