Productive Government Purchases and the Real Exchange Rate

8 Pages Posted: 29 Dec 2009

See all articles by Parantap Basu

Parantap Basu

Durham University - Department of Economics and Finance

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 8, 2009

Abstract

Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result.

Keywords: productive government purchases, real exchange rate

JEL Classification: F41, F42, E62

Suggested Citation

Basu, Parantap and Kollmann, Robert, Productive Government Purchases and the Real Exchange Rate (December 8, 2009). Available at SSRN: https://ssrn.com/abstract=1529054 or http://dx.doi.org/10.2139/ssrn.1529054

Parantap Basu

Durham University - Department of Economics and Finance ( email )

Durham, DH1 3HY
United Kingdom

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
48
Abstract Views
788
PlumX Metrics