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Mr. Keynes Meets the Classics: Government Spending and the Real Exchange Rate
Resource type
Authors/contributors
- Born, Benjamin (Author)
- D’Ascanio, Francesco (Author)
- Müller, Gernot J. (Author)
- Pfeifer, Johannes (Author)
Title
Mr. Keynes Meets the Classics: Government Spending and the Real Exchange Rate
Abstract
In economies with fixed exchange rates, the adjustment to government-spending shocks is asymmetric. Expansionary shocks are absorbed by the real exchange rate, contractionary shocks by output. This result emerges in a small open-economy model with downward nominal wage rigidity and is supported by new empirical evidence based on panel data from different exchange-rate regimes. The exchange-rate regime, economic slack, inflation, and how spending is financed all matter for the fiscal transmission mechanism in the way predicted by the model. Estimates that fail to distinguish between the effects of positive and negative shocks are subject to a ?depreciation bias.?
Publication
Journal of Political Economy
Volume
132
Issue
5
Pages
1642-1683
Date
2024-05-01
DOI
ISSN
0022-3808
Accessed
2024-06-27
Extra
Publisher: The University of Chicago Press
Citation
Born, B., D’Ascanio, F., Müller, G. J., & Pfeifer, J. (2024). Mr. Keynes Meets the Classics: Government Spending and the Real Exchange Rate. Journal of Political Economy, 132, 1642–1683.
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