The Effects of Fiscal Shocks on the Exchange Rate and the Trade Balance in the Euro Area

• Autores: Francisco de Castro Fernández, Daniel Garrote
• Localización: XIX Encuentro de Economía Pública: Políticas Públicas para la salida de la crisis, 2012, ISBN 978-84-695-1574-7, pág. 84
• Idioma: inglés
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• Resumen

  • We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the euro area within a standard structural VAR framework. We employ a new database that contains quarterly fiscal variables for the euro area as a whole. We show that higher government spending leads to real exchange rate appreciation and to a fall of net exports, jointly with lower primary budgetary surpluses, which turns out to be fully consistent with the �twin deficits� hypothesis. The different components of public spending, namely wage and non-wage consumption expenditure, overall public consumption expenditure and public investment, bring about real appreciations. Our results are therefore also consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector.