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The Composition of Government Spending and the Real Exchange Rate

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  • VAHAGN GALSTYAN
  • PHILIP R. LANE

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.

Suggested Citation

  • Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, September.
    • Handle: RePEc:wly:jmoncb:v:41:y:2009:i:6:p:1233-1249
    DOI: 10.1111/j.1538-4616.2009.00254.x
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    More about this item

    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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