Fiscal Policy, the Real Exchange Rate and Traded Goods

25 Pages Posted: 10 May 2010

See all articles by Tommaso Monacelli

Tommaso Monacelli

Bocconi University - Department of Economics

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Abstract

We estimate the effects of government spending shocks on the CPI real exchange rate, the trade balance and their co-movements with GDP and private consumption. We decompose the variations of the CPI real exchange rate into variations of the traded goods real exchange rate and the relative price of traded to non-traded goods. We reach three main conclusions: a rise in government spending induces a depreciation of the CPI real exchange rate and a trade balance deficit; private consumption rises in response to a government spending shock and therefore co-moves positively with the real exchange rate; both components of the CPI real exchange depreciate.

Suggested Citation

Monacelli, Tommaso and Perotti, Roberto, Fiscal Policy, the Real Exchange Rate and Traded Goods. The Economic Journal, Vol. 120, No. 544, pp. 437-461, May 2010. Available at SSRN: https://ssrn.com/abstract=1601558 or http://dx.doi.org/10.1111/j.1468-0297.2010.02362.x

Tommaso Monacelli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Roberto Perotti

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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