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Productive Government Purchases and the Real Exchange Rate

  • Parantap Basu
  • Robert Kollmann

Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result.

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File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/54143/1/RePEc_eca_wpaper_2010_001.pdf
File Function: RePEc_eca_wpaper_2010_001
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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number 2010_001.

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Length: 9 p.
Date of creation: 2010
Date of revision:
Publication status: Published by:
Handle: RePEc:eca:wpaper:2010_001
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Web page: http://difusion.ulb.ac.be

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  1. Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," CEPR Discussion Papers 6541, C.E.P.R. Discussion Papers.
  2. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  3. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  4. Robert Kollmann, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," ULB Institutional Repository 2013/7640, ULB -- Universite Libre de Bruxelles.
  5. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  6. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
  7. Basu, Parantap, 2001. "Reserve Ratio, Seigniorage and Growth," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 397-416, July.
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