Fiscal Shocks and the Real Exchange Rate

Abstract

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.

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