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How do Different Government Spending Categories Impact on Private Consumption and the Real Exchange Rate?


  • Baldi, Guido


The macroeconomic literature has found puzzling effects of government spending on private consumption, the real exchange rate and the terms of trade. Some authors find that private consumption increases after a shock to government spending, while others report a decrease. The same ambiguity can be found for the real exchange rate and the terms of trade. Our paper offers an intuitive explanation for these divergent results by distinguishing between productive and unproductive government spending. We show within a calibrated two-sector DSGE model that the two government spending categories have different effects on private consumption, the real exchange rate and the terms of trade. Hence, our findings suggest that the composition of government spending matters not only for long-run growth, but also impacts on the short-run.

Suggested Citation

  • Baldi, Guido, 2013. "How do Different Government Spending Categories Impact on Private Consumption and the Real Exchange Rate?," MPRA Paper 48600, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:48600

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    References listed on IDEAS

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    7. Eric Leeper & Todd B. Walker & Susan Shu-Chun Yang, 2009. "Government Investment And Fiscal Stimulus In The Short And Long Runs," Caepr Working Papers 2009-011, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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    13. Selma Mahfouz & Richard Hemming & Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity; A Review of the Literature," IMF Working Papers 02/208, International Monetary Fund.
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    More about this item


    Fiscal Policy; Productive Public Capital; Government Spending; Open Economy Macroeconomics;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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