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Government Purchases and the Real Exchange Rate

Listed author(s):
  • Robert Kollmann

    ()

Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate - which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange rate response. When faced with a country-specific rise in government purchases, local households experience a negative wealth effect; they thus work harder, and domestic output increases. Under balanced trade (financial autarky) this supply-side effect is so strong that the terms of trade worsen, and the real exchange rate depreciates. In a bonds-only economy, an increase in government purchases triggers a real exchange rate depreciation, if the rise in government purchases is sufficiently persistent and/or labor supply is highly elastic.

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File URL: http://hdl.handle.net/10.1007/s11079-009-9148-2
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 21 (2010)
Issue (Month): 1 (February)
Pages: 49-64

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Handle: RePEc:kap:openec:v:21:y:2010:i:1:p:49-64
DOI: 10.1007/s11079-009-9148-2
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Order Information: Web: http://www.springer.com/economics/international+economics/journal/11079/PS2

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  1. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
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  8. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International Portfolios with Supply, Demand and Redistributive Shocks," NBER Chapters,in: NBER International Seminar on Macroeconomics 2007, pages 231-263 National Bureau of Economic Research, Inc.
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  11. Kollmann, Robert, 1991. ""Essays on International Business Cycles", PhD thesis, Economics Department, University of Chicago, 1991," MPRA Paper 69905, University Library of Munich, Germany.
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  14. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
  15. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2012. "Fiscal Stimulus with Spending Reversals," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 878-895, November.
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  17. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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  22. Sutherland, Alan & Lombardo, Giovanni, 2003. "Monetary and fiscal interactions in open economies," Working Paper Series 289, European Central Bank.
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