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Government spending shocks and the real exchange rate in China: Evidence from a sign-restricted VAR model

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  • Chen, Yong
  • Liu, Dingming

Abstract

This study analyzes the impact of government spending shocks on the real exchange rate in China over the period 1995Q1 - 2015Q2 using a structural VAR framework. To achieve identification, we derive robust restrictions on the sign of several impulse responses from an open economy general equilibrium model calibrated to China's economy. The results show that expansionary government consumption shocks and government investment shocks both lead to real exchange rate appreciation, which is different from the empirical evidence for some developed countries but is in line with the prediction of the conventional Mundell-Fleming model. We also find that both positive government consumption and investment shocks lead to a fall in the trade balance jointly with higher government deficits, which generate twin deficits.

Suggested Citation

  • Chen, Yong & Liu, Dingming, 2018. "Government spending shocks and the real exchange rate in China: Evidence from a sign-restricted VAR model," Economic Modelling, Elsevier, vol. 68(C), pages 543-554.
    • Handle: RePEc:eee:ecmode:v:68:y:2018:i:c:p:543-554
    DOI: 10.1016/j.econmod.2017.03.027
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    Cited by:

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    2. Zhang, Bin & Liu, Zuyao & Wang, Zhaohua & Zhang, Shuang, 2023. "The impact of geopolitical risk on energy security: Evidence from a GMM panel VAR approach," Resources Policy, Elsevier, vol. 86(PB).
    3. Nurudeen Abu & Awadh Ahmed Mohammed Gamal, 2020. "An Empirical Investigation of the Twin Deficits Hypothesis in Nigeria: Evidence from Cointegration Techniques," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.
    4. Wen Zhang, 2024. "The evolving international effects of China's government spending," The World Economy, Wiley Blackwell, vol. 47(5), pages 1851-1869, May.
    5. Chen, Yong & Liu, Dingming & Zhuang, Ziguan, 2023. "The spillover effects of China's monetary policy shock: Evidence from B&R countries," Emerging Markets Review, Elsevier, vol. 55(C).
    6. Lin Zhu & Jian He, 2024. "China financial stability and asymmetric implications for economic stability," Economic Change and Restructuring, Springer, vol. 57(1), pages 1-29, February.
    7. Biswajit Maitra & Dhritiman Ganguli, 2024. "Fiscal policy and real exchange rate variations in India," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(3), pages 619-640, September.
    8. 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.
    9. Piotr Bartkiewicz, 2020. "Quantitative Easing: New Normal or Emergency Measure?," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.

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    More about this item

    Keywords

    Government spending shocks; Real exchange rate; VAR; Sign restriction;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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