The Composition of Government Spending and the Real Exchange Rate

Authors: GALSTYAN, VAHAGN¹; LANE, PHILIP R.²

Source: Journal of Money, Credit and Banking, Volume 41, Number 6, September 2009 , pp. 1233-1249(17)

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Abstract:

We show that the composition of government spending influences the long-run behavior 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.

Keywords: E62; F31; F41; government consumption; government investment; real exchange rate

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1538-4616.2009.00254.x

Affiliations: 1: Vahagn Galstyan is at Trinity College Dublin ( )., Email: v.galstyan@tcd.ie 2: Philip R. Lane is a Professor at Trinity College Dublin ( )., Email: plane@tcd.ie

Publication date: 2009-09-01