This paper is part of a research project “An Analysis of the Impact of European Monetary Union on Irish Macroeconomic Policy,” funded by the Irish Research Council for Humanities and Social Sciences.
The Composition of Government Spending and the Real Exchange Rate
Article first published online: 10 AUG 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue 6, pages 1233–1249, September 2009
How to Cite
GALSTYAN, V. and LANE, P. R. (2009), The Composition of Government Spending and the Real Exchange Rate. Journal of Money, Credit and Banking, 41: 1233–1249. doi: 10.1111/j.1538-4616.2009.00254.x
- Issue published online: 10 AUG 2009
- Article first published online: 10 AUG 2009
- Received July 9, 2008; and accepted in revised form February 12, 2009.
- government consumption;
- government investment;
- real exchange rate
We show that the composition of government spending influences the long-run behavior of the real exchange rate. We develop a two-sector small open-economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.