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Fiscal shocks, the real exchange rate and the trade balance: some evidence for emerging economies

Author

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  • da Silva Marcelo Eduardo Alves

    (Departamento de Economia and PIMES/UFPE, Universidade Federal de Pernambuco, Recife, Brazil)

  • Baerlocher Diogo
  • de Paiva Fonseca Henrique Veras

    (Department of Economics, University of Illinois at Urbana-Champaign, 1407 W. Gregory, 214 David Kinley Hall, Urbana, IL, USA)

Abstract

This paper implements a structural vector auto regression (SVAR) analysis to investigate the impacts and importance of fiscal shocks on the dynamics of the real exchange rate and the trade balance in three emerging economies: Brazil, Chile and Mexico. We show that the effects of an unexpected increase in government spending are not uniform across countries with higher spending leading to a depreciation of the real exchange rate in Brazil and Chile, whereas in Mexico, we observe an appreciation. The trade balance deteriorates in all three countries. We also report that an unexpected increase in taxes leads to recessionary impacts and improves the trade balance. Only in Mexico is there evidence of a real exchange rate depreciation. Finally, we show that fiscal shocks account for roughly 20% of real exchange fluctuations.

Suggested Citation

  • da Silva Marcelo Eduardo Alves & Baerlocher Diogo & de Paiva Fonseca Henrique Veras, 2015. "Fiscal shocks, the real exchange rate and the trade balance: some evidence for emerging economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(2), pages 727-768, July.
    • Handle: RePEc:bpj:bejmac:v:15:y:2015:i:2:p:727-768:n:3
    DOI: 10.1515/bejm-2014-0018
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    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    3. Ramona Tiganasu & Gabriela Carmen Pascariu & Dan Lupu, 2022. "Competitiveness, fiscal policy and corruption: evidence from Central and Eastern European countries," Oeconomia Copernicana, Institute of Economic Research, vol. 13(3), pages 667-698, September.
    4. Wee Chian Koh, 2017. "Fiscal multipliers: new evidence from a large panel of countries," Oxford Economic Papers, Oxford University Press, vol. 69(3), pages 569-590.
    5. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.

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