The Composition of Government Spending and the Real Exchange Rate

23 Pages Posted: 20 Aug 2008

See all articles by Vahagn Galstyan

Vahagn Galstyan

Trinity College (Dublin)

Philip R. Lane

Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR); Central Bank of Ireland

Date Written: July 2008


We show that the composition of government spending influences the long-run behaviour 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.

Keywords: government consumption, government investment, real exchange rate

JEL Classification: E62, F31, F41

Suggested Citation

Galstyan, Vahagn and Lane, Philip R., The Composition of Government Spending and the Real Exchange Rate (July 2008). CEPR Discussion Paper No. DP6903. Available at SSRN:

Vahagn Galstyan

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster

Philip R. Lane (Contact Author)

Trinity College (Dublin) - Department of Economics ( email )

Trinity College
Dublin 2
+353 1 608 2259 (Phone)
+353 1 677 2503 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2

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