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The Effects Of Fiscal Shocks On The Exchange Rate In Spain

  • Francisco de Castro

    (Banco de España)

  • Laura Fernández

    (Banco de Sabadell)

We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. Government spending brings about positive responses of output and private consumption, jointly with real appreciation and a fall in trade balances. Real appreciation is explained by persistent nominal appreciation and higher relative prices. Accordingly, our results are largely consistent with the predictions of not only the conventional Mundell-Fleming model, but also of a number of New Keynesian models under standard calibrations. Moreover, our estimations are also consistent with the “twin deficits” hypothesis.

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Article provided by Economic and Social Studies in its journal Economic and Social Review.

Volume (Year): 44 (2013)
Issue (Month): 2 ()
Pages: 151-180

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Handle: RePEc:eso:journl:v:44:y:2013:i:2:p:151-180
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