How do fiscal and technology shocks affect real exchange rates?

Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identification, we derive robust re...

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Bibliographic Details
Published in:Journal of international economics 2011, Vol.83 (1), p.53-69
Main Authors: Enders, Zeno, Müller, Gernot J., Scholl, Almuth
Format: Article
Language:English
Subjects:
Economic shock
Exchange rates
Fiscal policy
Government spending shocks
New technology
Public expenditure
Real exchange rate
Sign restrictions
Technology shocks
Terms of trade
U.S.A
VAR
Vector-autoregressive models
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Summary:Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identification, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade—whose responses are left unrestricted—depreciate in response to expansionary government spending shocks and appreciate in response to positive technology shocks.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2010.08.005