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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.

JEL codes

E62, F31, F41


government consumption, government investment, real exchange rate

Last updated 28 August 2014 by IIIS (Email).