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The Composition of Government Spending and the Real Exchange Rate

  • Vahagn Galstyan and Philip R. Lane

We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp257.

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Date of creation: 07 Jul 2008
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Handle: RePEc:iis:dispap:iiisdp257
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  1. Ph.R. Lane & G.M. Milesi-Ferretti, 2003. "External Wealth, the Trade Balance, and the Real Exchange Rate," DNB Staff Reports (discontinued) 80, Netherlands Central Bank.
  2. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
  4. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 269-328 National Bureau of Economic Research, Inc.
  5. 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.
  6. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  7. Philip R. Lane & Gian Maria Milesi-Ferretti, 2000. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," Working Papers 062000, Hong Kong Institute for Monetary Research.
  8. Tommaso Monacelli & Roberto Perotti, 2008. "Openness and the Sectoral Effects of Fiscal Policy," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 395-403, 04-05.
  9. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  10. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.
  11. International Monetary Fund, 2005. "New Rates From New Weights," IMF Working Papers 05/99, International Monetary Fund.
  12. Kappeler, Andreas & Välilä, Timo, 2008. "Fiscal federalism and the composition of public investment in Europe," European Journal of Political Economy, Elsevier, vol. 24(3), pages 562-570, September.
  13. Luca Antonio Ricci & Jaewoo Lee & Gian-Maria Milesi-Ferretti, 2008. "Real Exchange Rates and Fundamentals: A Cross-Country Perspective," IMF Working Papers 08/13, International Monetary Fund.
  14. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-34, March.
  15. Morten O. Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," Economics Working Papers ECO2007/23, European University Institute.
  16. Vahagn Galstyan, 2007. "Country Size and the Transfer Effect," The Institute for International Integration Studies Discussion Paper Series iiisdp204, IIIS.
  17. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
  18. van Ark, Bart, 1998. "Productivity," Journal of the Japanese and International Economies, Elsevier, vol. 12(2), pages 171-174, June.
  19. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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