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The effects of fiscal shocks on the exchange rate in Spain


  • Francisco de Castro

    () (Banco de España)

  • Laura Fernández-Caballero

    () (Banco de España)


We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the “twin deficits” hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.

Suggested Citation

  • Francisco de Castro & Laura Fernández-Caballero, 2011. "The effects of fiscal shocks on the exchange rate in Spain," Working Papers 1121, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1121

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    References listed on IDEAS

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    Cited by:

    1. Francisco Castro & Daniel Garrote, 2015. "The effects of fiscal shocks on the exchange rate in the EMU and differences with the USA," Empirical Economics, Springer, vol. 49(4), pages 1341-1365, December.
    2. Vesna Stojcevska & Mite Miteski, 2016. "Assessment of the Impact of Fiscal Policy on the Current Account – the Twin Deficit Hypothesis in the Case of Macedonian Economy," Working Papers 2016-01, National Bank of the Republic of Macedonia.
    3. Eunji Kim & Yoonhee Ha & Sangheon Kim, 2017. "Public Debt, Corruption and Sustainable Economic Growth," Sustainability, MDPI, Open Access Journal, vol. 9(3), pages 1-30, March.
    4. Francisco de Castro & Francisco Martí & Antonio Montesinos & Javier J. Pérez & A. Jesús Sánchez-Fuentes, 2014. "Fiscal policies in Spain: Main stylises facts revisited," Working Papers 1408, Banco de España;Working Papers Homepage.

    More about this item


    SVAR; Fiscal shocks; Effective exchange rates; Twin deficits; Fiscal multipliers;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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