Fiscal Policy and the Real Exchange Rate

Abstract

Government spending on infrastructure has recently increased sharply in many emerging-market economies. This paper examines the mechanism through which public infrastructure spending affects the dynamics of the real exchange rate. Using a two-sector dependent open economy model with intersectoral adjustment costs, we show that government spending generates a nonmonotonic U-shaped adjustment path for the real exchange rate with sharp intertemporal tradeoffs. The effect of government spending on the real exchange rate depends critically on (i) the composition of public spending, (ii) the underlying financing policy, (iii) the intensity of private capital in production, and (iv) the relative productivity of public infrastructure. In deriving these results, the model also identifies conditions under which the predictions of the neoclassical open economy model can be reconciled with empirical regularities, namely the intertemporal relationship between government spending, private consumption, and the real exchange rate.

In medium properties of K0 and $\phi$ϕ mesons under an external magnetic field

“…Thus the principle of minimum energy in star matter requires the presence of hyperons, but calculations based on this fact seems to be in contradiction with the observational data. This complex situation has been known as the hyperon puzzle and has been analyzed in detail in recent years [46,47,48]. A possible solution of this problem involves the φ meson, since it can induce additional repulsion in the hyperon-hyperon (YY) channel without modifying the low density behavior because of the OZI rule [49,50].…”

The Impact of External Debt on Exchange Rate Variation in Romania

“…Using a two-sector dependent open economy model with intersectoral adjustment costs, they has shown that government spending generates a non-monotonic U-shaped adjustment path for the real exchange rate with sharp intertemporal tradeoffs. The effect of government spending on the real exchange rate depends critically on (i) the composition of public spending, (ii) the underlying financing policy, (iii) the intensity of private capital in production, and (iv) the relative productivity of public infrastructure (Chatterjee, Mursagulov, 2012). The influence of the following key GDP, inflation rate, money supply, interest rate and balance of payments on exchange rate of the Romanian leu was examined against the most important currencies (EUR, USD) during 2000-2010 period.…”

The effect of fiscal deficits on the external imbalances in the European Union

“…Using a two-sector dependent open economy model, Santanu Chatterjee and Azer Mursagulov (2012) investigated the mechanism through which government spending affects the real exchange rate and trade flows. The authors suggest that the sectoral composition of spending, financing policies, investment in certain manufacturing areas and the relative productivity of public infrastructure, basically determine the final effect of higher public expenditure on the appreciation or depreciation of the currency and, consequently, to the movement of imports and exports.…”