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Fiscal shocks and the exchange rate


  • Giorgio Di Giorgio Author-Name-First Giorgio

    () (LUISS University)

  • Salvatore Nistico' Author-Name-First Salvatore

    () (University of Rome Sapienza)

  • Guido Traficante Author-Name-First Guido

    () (European University of Rome)


This paper shows that the result implied by the Redux model of Obstfeld and Rogoff (1995) - that the exchange rate depreciates in response to balanced-budget fiscal expansions - is completely reversed once we account for two key features of modern New Open Economy Macroeconomics models: home bias in public consumption and endogenous monetary policy.

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  • Giorgio Di Giorgio Author-Name-First Giorgio & Salvatore Nistico' Author-Name-First Salvatore & Guido Traficante Author-Name-First Guido, 2014. "Fiscal shocks and the exchange rate," Working Papers CASMEF 1401, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:casmef:1401

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    References listed on IDEAS

    1. Giorgio Di Giorgio & Salvatore Nistico, 2007. "Monetary Policy and Stock Prices in an Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1947-1985, December.
    2. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
    3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    4. Di Giorgio, Giorgio & Nisticò, Salvatore, 2013. "Productivity shocks, stabilization policies and the dynamics of net foreign assets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 210-230.
    5. Thomas Lubik & Frank Schorfheide, 2006. "A Bayesian Look at the New Open Economy Macroeconomics," NBER Chapters,in: NBER Macroeconomics Annual 2005, Volume 20, pages 313-382 National Bureau of Economic Research, Inc.
    6. Ganelli, Giovanni, 2005. "Home Bias In Government Spending And Quasi Neutrality Of Fiscal Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 288-294, April.
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    More about this item


    Redux Model; Exchange Rate; Fiscal Shocks; Endogenous Monetary and Fiscal Policy.;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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