Fiscal Shocks and the Real Exchange Rate
by Agustín S. Bénétrixa and Philip R. Lanea,b
We estimate the real exchange rate impact of shocks to
government spending for a panel of member countries of the
euro area. Our key finding is that the impact differs across
different types of government spending, with shocks to public
investment generating larger and more persistent real appreciation
than shocks to government consumption. Within the
latter category, we also show that the impact of shocks to the
wage component of government consumption is more persistent
than that of shocks to the non-wage component. Finally,
we highlight the different exchange rate responses between this
group and a group of countries with floating exchange rates.
JEL Codes: E62, F31.
Full article (PDF, 32 pages 2322 kb)
a IIIS, Trinity College Dublin