The effects of government spending on real exchange rates: Evidence from military spending panel data

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 r...

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Bibliographic Details
Published in:Journal of international economics 2019-01, Vol.116, p.144-157
Main Authors: Miyamoto, Wataru, Nguyen, Thuy Lan, Sheremirov, Viacheslav
Format: Article
Language:English
Subjects:
Fiscal policy
Military spending
Real exchange rates
Risk sharing
Twin deficit
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Summary: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 decreases in both groups of countries. These findings are not consistent with standard international business cycle models. We discuss potential sources of the differences between advanced and developing countries in the responses to spending shocks.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2018.11.009