[PDF] Explaining The Effects Of Government Spending Shocks On Consumption And The Real Exchange Rate eBook

Author : Morten O. Ravn
Publisher :
Page : 0 pages
File Size : 27,79 MB
Release : 2007
Category : Consumption (Economics)
ISBN :

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Using structural VAR analysis, we document that in a panel of industrialized countries, an increase in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance, and a depreciation of the real exchange rate (i.e., a decrease in the domestic CPI relative to the exchange-rate adjusted foreign CPI). We propose an explanation for these observed effects based on the deep habit mechanism. We estimate the key parameters of the deep-habit model employing a limited information approach. The predictions of the estimated deep-habit model fit remarkably well the observed responses of output, consumption, the trade balance, and the real exchange rate to an unanticipated government spending shock. In addition, the deep-habit model predicts that in response to an anticipated increase in government spending consumption and wages fail to increase on impact, which is consistent with the empirical evidence stemming from the narrative identification approach. In this way, the deep-habit model reconciles the findings of the SVAR and narrative literatures on the effects of government spending shocks.

Author : Wataru Miyamoto
Publisher :
Page : 44 pages
File Size : 13,53 MB
Release : 2016
Category :
ISBN :

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Using panel data on military spending for 125 countries, we document new facts about the effects of changes in government purchases on the real exchange rate, consumption, and current accounts in both advanced and developing countries. While an increase in government purchases causes real exchange rates to appreciate and increases consumption significantly in developing countries, it causes real exchange rates to depreciate and decreases consumption in advanced countries. The current account deteriorates in both groups of countries. These findings are not consistent with standard international business-cycle models. We investigate whether the difference between advanced economies and developing countries in the responses of real exchange rates to spending shocks can be explained by alternative hypotheses.

Author :
Publisher :
Page : 89 pages
File Size : 42,69 MB
Release : 2014
Category :
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In Chapter 1, using panel structural VAR analysis with quarterly data from six emerging Latin American countries, we document that the effects of government spending shocks depend on the share of public debt denominated in foreign currency. We find that the ratio of public debt denominated in foreign currency is a critical determinant of the real exchange rate responses. Economies with larger exposure to the foreign currency denominated public debt (HFC) responds with a real exchange rate depreciation to an increase in government consumption expenditure, while economies with a lower ratio (LFC) respond with real exchange rate appreciation. Correspondingly, the debt-to-GDP ratio in the HFC group increases faster in response to government spending shocks. Moreover, a rise in government spending increases private consumption more significantly in the HFC group. We find that government spending shocks raise output and consumption regardless of the currency denomination of debt. Moreover, the fiscal multipliers in both two groups are above one. To offer a theoretical explanation of these observed patterns, in Chapter 2 we develop a simple small open economy version of New Keynesian Open Economy Model (NOEM) and compare two model specifications which differ in the assumption about the currency denomination of debt: a foreign-currency bond economy (FB) and a domestic-currency bond economy (DB). In the FB (DB) economy, all debt is issued in foreign (domestic) currency. Comparing these two extreme assumptions allows us to shed light on the role of currency denomination of debt in explaining the cross-country variations in the effects of government spending shocks. We show that our proposed model can replicate the empirical findings documented in Chapter 1. A novel feature of our model is that the country-specific risk premium is positively correlated with the expected exchange rate depreciation, and the correlation parameter depends on currency denomination of debt. We discuss how our modification of risk premium makes the real exchange determined by two competing forces and under what conditions a real depreciation can be generated. In Chapter 3, we propose a generalized model in which both types of debt coexist and the ratio of foreign currency debt endogenously determines the strength of exchange rate depreciation mechanism. The model is shown to replicate well the observed responses of macroeconomic variables to an increase in government spending.

Author : Mr.Carlos I. Medeiros
Publisher : International Monetary Fund
Page : 33 pages
File Size : 38,47 MB
Release : 1997-10-01
Category : Business & Economics
ISBN : 145193548X

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This paper examines the effects of capital inflows and domestic factors on Brazil’s real exchange rate. It describes the analytical framework, and then estimates a near-VAR model linking capital flows, interest rate differentials, government spending, money-base velocity, and the temporary component of the real exchange rate (TCRER). Generalized variance decompositions indicate that world interest rate shocks largely explain medium-term fluctuations in capital flows and the TCRER. Generalized impulse response functions show that a reduction in the world interest rate (and, to a lesser extent, an increase in government spending) have significant effects on the TCRER and capital flows.

Author : International Monetary Fund
Publisher : International Monetary Fund
Page : 27 pages
File Size : 24,88 MB
Release : 2010-11-01
Category : Business & Economics
ISBN : 1455209457

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This paper describes the compilation of the first truly comprehensive database on gross government debt-to-GDP ratios, covering nearly the entire IMF membership (174 countries) and spanning an exceptionally long time period. The database was constructed by bringing together a number of other datasets and information from original sources. For the most recent years, the data are linked to the IMF World Economic Outlook (WEO) database to facilitate regular updates. The paper discusses the evolution of debt-to-GDP ratios across country groups for several decades, episodes of debt spikes and reversals, and a pattern of negative correlation between debt and growth.

Author : Mr.Nooman Rebei
Publisher : International Monetary Fund
Page : 31 pages
File Size : 14,59 MB
Release : 2017-03-13
Category : Business & Economics
ISBN : 1475586671

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We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.

Author : Richard Hemming
Publisher : International Monetary Fund
Page : 62 pages
File Size : 28,17 MB
Release : 2002-12
Category : Business & Economics
ISBN :

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This paper reviews the theoretical and empirical literature on the effectiveness of fiscal policy. The focus is on the size of fiscal multipliers, and on the possibility that multipliers can turn negative (i.e., that fiscal contractions can be expansionary). The paper concludes that fiscal multipliers are overwhelmingly positive but small. However, there is some evidence of negative fiscal multipliers.

Author : Ethan Ilzetzki
Publisher : International Monetary Fund
Page : 68 pages
File Size : 18,45 MB
Release : 2011-03-01
Category : Business & Economics
ISBN : 1455218022

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We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fisscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.