Mr. Keynes meets the classics: Government spending and the real exchange rate

Arbeitspapier

In economies with fixed exchange rates, the adjustment to government spending shocks is asymmetric. A fiscal expansion appreciates the real exchange rate but does not stimulate output. A fiscal contraction does not alter the exchange rate, but lowers output. We develop these insights in a two-sector model of a small open economy with downward nominal wage rigidity. We establish new empirical evidence that supports the predictions of the model along several dimensions: not only does the exchange rate regime shape the fiscal transmission mechanism as predicted by the model - in doing so it also interacts with economic slack and inflation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ifo Working Paper ; No. 352

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policy ; Open Economy Macroeconomics ; International Business Cycles
• Subject: Downward nominal wage rigidity ; government spending shocks ; exchangerate peg ; real exchange rate ; nonlinear effects ; asymmetric adjustment ; depreciation bias

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Born, Benjamin ; D'Ascanio, Francesco ; Müller, Gernot J. ; Pfeifer, Johannes
• Event: Veröffentlichung
• (who): ifo Institute - Leibniz Institute for Economic Research at the University of Munich
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/235239
• Last update: 10.03.2025, 11:42 AM CET