Fiscal Stance and the Real Exchange: Some Empirical Estimates
This paper presents some empirical results on the dynamic relationship between fiscal policy and the real exchange rate in the G3 countries since advent of floating exchange rates. This subject is of some interest given the recent shift to fiscal surpluses in the US, the annual announcement of yet another fiscal stimulus package in Japan, and Maastricht limits on fiscal deficits in Germany and the rest of Euroland. To the extent that the foreign exchange market anticipates that fiscal contractions will follow expansions,' as would be required by the government's intertemporal budget constraint when holding constant the present value of tax collections, it is possible that the exchange rate response to any contemporaneous index of fiscal stance will depend upon exactly what stage the government's fiscal cycle' is (thought to be) in. We find a similarity across the G3 countries in their estimated dynamic responses to a fiscal shock. At first, and for several years thereafter, the real exchange rate appreciates in response to an expansionary fiscal shock. However, eventually, the process is reversed; the real exchange rate overshoots and actually depreciates relative to its initial prevailing before the fiscal shock.
|Date of creation:||Apr 1999|
|Date of revision:|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Clarida, Richard & Galí, Jordi, 1994.
"Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?,"
CEPR Discussion Papers
951, C.E.P.R. Discussion Papers.
- Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
- Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
- Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
- Jordi Galí & Richard Clarida, 1993. "Sources of real exchage rate fluctuations: How important are nominal shocks?," Economics Working Papers 66, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1994.
- Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996.
"The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds,"
The Review of Economics and Statistics,
MIT Press, vol. 78(1), pages 16-34, February.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
- Kenneth Froot & Kenneth Rogoff & Olivier Blanchard & Stanley Fischer, .
"The EMS, the EMU, and the Transition to a Common Currency,"
32216, Harvard University OpenScholar.
- 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.
- Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Working Papers 3684, National Bureau of Economic Research, Inc.
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-47, April.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:7077. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.