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Fiscal Shocks and The Real Exchange Rate

Agustín S. Bénétrix and Philip R. Lane

Abstract

We estimate the impact of shocks to government spending on the real exchange rate for a panel of EMU member countries. Our key finding is that the impact differs across different types of government spending, with shocks to public investment generating a larger and more persistent impact on the real exchange rate 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 larger than for shocks to the non-wage component.

Keywords:

government spending; real exchange rate; panel VAR; European Monetary Union

JEL No.:

E62; F31


Last updated 28 August 2014 by IIIS (Email).