Government spending and the real exchange rate

Abstract

I study the effect of government spending on the real exchange rate in an open economy version of the Sidrauski model with a time-varying rate of time preference that introduces complementarity between consumption at different points in time. I show that a balanced budget fiscal expansion causes a real depreciation and a current account surplus if the expansion falls on traded goods. If the increase falls instead on nontraded goods, both the ‘stylized’ results of a real appreciation and a current account deficit and the ‘perverse’ result of an appreciation and a surplus can occur.

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