The importance of composition of fiscal policy: evidence from different exchange rate regimes

We study the macroeconomic effects of fiscal policies in an open economy. We emphasize two transmission mechanisms: the cost channel, by which wage government spending and labor taxes raise the real wage firms must pay, and the exchange rate channel, by which the nominal exchange rate shifts induced by fiscal policy have real effects if (some) prices and wages are sticky. The latter channel implies that changes in wage government spending or in labor taxation should have different effects under flexible than under fixed exchange rates. In a 1964–93 panel of OECD countries we find significant evidence for both channels. Moreover, we find that the real product wage and profitability are more responsive than quantities (employment and output) to fiscal policy innovations.     

Government‐spending multipliers and the zero lower bound in an open economy

This paper assesses the size of the government‐spending multiplier in an open economy when the zero lower bound (ZLB) on the nominal interest rate is binding. In a theoretical framework, in a closed economy, other authors have shown that when the nominal interest rate is binding the government‐spending multiplier can be very large (close to four). Their theory helps illuminate the government‐spending multiplier in the ZLB, but it is difficult to match that theory with the data. We argue that, in an open economy, another channel exists for the crowding‐out effect via the real exchange rate. For an open economy, the government‐spending multiplier is not large owing to the appreciation of the real exchange rate, induced by the appreciation of aggregate demand that follows the increases in government spending. To test the robustness of our open economic model, we conduct the same analysis in a corresponding closed economy model. The result from our closed economy model confirms the result obtained in the other work. Our theoretical results are consistent with the results obtained in the empirical literature, which uses the vector autoregressive method and the structural vector autoregressive approach to measure the impact of government‐spending shock on the real gross domestic product and revealed that the government‐spending multiplier tends to be lower in open economy.     

Government Spending and Real Interest Rate in an Open Economy

This paper investigates the dynamic effect of government spending in an optimizing monetary model of an open economy with capital immobility and fixed exchange rates. It is found that a rise in government spending will always lead to a reduction in real interest rates on impact. Moreover, real interest rates can be lower during temporary periods of high government spending. This result is compatible with the observation of low real interest rates during wars.     

Cointegration and Causal Relationship between Taxes and Spending for Kenya,Nigeria and South Africa

Causal relationships between taxes and spending are examined for three African countries using the GDP as a control variable, and dummy variables to address structural changes in Nigeria and South Africa. There is one cointegration equation between nominal fiscal variables in all three countries, one cointegration equation for Kenya and two cointegration equations for Nigeria and South Africa for the real fiscal variables and their respective dummy variables. Short-term results of the nominal variables show fiscal independence for all three countries. In real terms, taxes cause spending for Kenya and Nigeria and a weak fiscal synchronization for South Africa. There is long run fiscal synchronization in nominal terms for all three countries, and in real terms for both Nigeria and South Africa, while real taxes cause spending in Kenya. Long-run estimates show a unit increase in nominal (real) taxes translating into a less than proportionate increase in nominal (real) spending for Kenya and South Africa, and a more than proportionate increase in nominal (real) spending for Nigeria. Fiscal imbalance is not a threat in the budgetary process in Kenya and South Africa, but an issue of concern in Nigeria, where oil revenues are a major source of support for budget short falls.     

The impact of oil prices on income and energy

The major determinant of real income growth in Korea is real oil prices, followed by money supply, exchange rates, energy consumption, and government spending. Over the longer horizon, the effects of exchange rates, oil prices, government spending, and money supply become more pronounced. For energy consumption, the most important factor is oil prices, followed by exchange rates, government spending, money supply, and income. For the association between energy consumption and real income, energy consumption influences real income growth only through energy consumption, while real income affects energy consumption only through the error correction term. The findings of the study thus suggest that the level of economic activity and energy consumption mutually influence each other.     

Nonlinear Exchange Rate Adjustment and the Monetary Model

Although the empirical literature has delivered evidence in favor of nonlinearities in nominal and real exchange rate adjustment, the corresponding mechanisms with respect to the relationship between nominal exchange rates and fundamentals in general have rarely been put under any close scrutiny. This paper extends the work of other authors, who estimate exponential smooth transition autoregressive models to deviations of the exchange rate from monetary fundamentals. Using monthly data from 1976:01 to 2010:12 for the USA, UK, and Japan, this paper first adopts a cointegrated vector autoregression (VAR) framework to test for the multivariate validity of the monetary model by applying restrictions on the long‐run relationships. Then, nonlinear vector error correction models are estimated to tackle the question of whether the adjustment of the nominal exchange rate with respect to those relationships follows a nonlinear path.     

RE-EXAMINING THE EFFECTIVENESS OF STABILISATION POLICY

This paper develops an alternative international macroeconomic model for evaluating the effectiveness of fiscal and monetary policy in stabilising national income under fixed and floating exchange rates. It encompasses national output and income, saving, investment, money and capital flows and linkages between the exchange rate, price levels and real interest rates consistent with international parity conditions. It demonstrates that the nature of government spending is pivotal to the effectiveness of fiscal policy, revealing that, ceteris paribus , higher public consumption expenditure contracts national income and depreciates the exchange rate, whereas higher productive public investment spending has opposite effects. The framework also shows that the effectiveness of fiscal and monetary policy as macroeconomic policy instruments is not ultimately dependent on the exchange rate regime.     

MONEY,CAPITAL, AND EXCHANGE RATE FLUCTUATIONS*

We explore how the informational frictions underlying monetary exchange affect international exchange rate dynamics. Our perfectly flexible price model is capable of producing endogenously rigid international relative prices in response to technology and monetary shocks. The model is capable of accounting for the empirical regularities that the real and nominal exchange rates are more volatile than U.S. output, and that the two are positively and perfectly correlated. The model is also consistent with other standard real business cycle facts for the United States.     

Monetary Shocks and Real Exchange Rate Hysteresis: Evidence from the G-7 Countries

Long-run monetary neutrality specifies that nominal disturbances do not affect long-run real exchange rates. However, the "over depreciation" of the US dollar in the late 1980s, after its strong appreciation earlier in the decade, suggested to a number of observers that nominal disturbances alter long-run real exchange rates; that is, money supply shocks entail real exchange rate hysteresis. Using data from the G-7 countries and the post-1973 float, the paper measures the long-run effects of relative money supply disturbances on real US dollar exchange rates. Little evidence of hysteretic monetary policy effects is found.     

Real and nominal effective exchange rates for 22 LDCs: 1971:1–1990:4

The International Monetary Fund constructs and publishes the real and nominal effective exchange rates, mostly for developed but not less developed countries. This paper employs a method of constructing real and nominal effective exchange rate from the literature to produce quarterly data over the 1971–1990 period for 22 developing nations. As an application, the stationarity of real effective exchange rates are determined to establish the empirical validity of the Purchasing Power Parity Theory (PPP). The results reveal that PPP fails to hold for most countries.     

The Real Exchange Rate Always Floats

This paper makes two main points. First, irrespective of nominal exchange rate arrangements, the real exchange rate always floats — if not through nominal exchange rate adjustment, then through price change. Further, because prices and wages tend to be sticky, the adjustment of real exchange rates towards long–run equilibrium takes time, as witnessed by long–lasting currency misalignments around the world. In second place, real exchange rates are rather likely to fluctuate on their way towards long–run equilibrium because of the dynamic interaction between real exchange rates and the current account or, put differently, because the structure of lags with which exchange rates impact the volume of exports and imports may give rise to oscillatory behaviour.     

Oil windfall,public spending and price stability: modelling inflation in Chad

This article examines the determinants of inflation in Chad using quarterly data from 1983:Q1 to 2009:Q3. The analysis is based on a single-equation model, completed by a Structural Vector Autoregression (SVAR) model to capture inflation persistence. The results show that the main determinants of inflation in Chad are rainfall, foreign prices, exchange rate movements and particularly public spending, which soared following the onset of oil production in 2003. The effects of rainfall shocks and changes in foreign prices on inflation persist during six quarters. Changes in public spending and the nominal exchange rate affect inflation during three and four quarters, respectively.     

The implications for an open economy of partisan political business cycles: Theory and evidence

This paper develops and tests the predictions of two open economy models in which partisan effects are present, a small-country-one-good model of exchange rate determination and a model that assumes the two countries each specialize in the production of one good. From these models, we can obtain predictions for the behaviour of the terms of trade, the current account, and real and nominal exchange rates. The predictions are tested empirically using panel data from 14 OECD countries and the results provide support for the theoretical predictions that systematic partisan effects are present in current accounts, real exchange rates, and the terms of trade.     

Real exchange rate dynamics in sticky wage models

We investigate the role of sticky wages in accounting for real exchange rate dynamics. Unlike the sticky price economy, government spending shocks play a more important role than technology shocks in explaining the hump-shaped impulse responses of real exchange rates.     

Exchange rate volatility and the demand for money in the U.S.

This paper examines the effect of changes in the level and volatility of exchange rates on the demand for money. It hypothesizes that exchange rate volatility exerts a negative influence on money demand separate from the effect of the level of exchange rates. Using U.S. data covering the period from 1974.1 to 1990.4, it is found that, regardless of whether the adjustment process is modeled as an error-correction or a partial-adjustment model, exchange rate volatility is negatively related to the demand for real M2 balances. This relationship is found to be more pronounced when exchange rates are expressed in real terms. The results imply that money demand responds to both the volatility of domestic prices relative to foreign prices and to the volatility of nominal exchange rates. Little evidence is found in support of the hypothesis that the level of exchange rates exerts a significant influence on money demand.     

Sectoral labor adjustment and monetary policy in a small open economy

This paper studies the welfare implications of sectoral labor adjustment cost in a two-sector small open economy model with sticky prices. We find that, when the economy faces external shocks, if monetary policy can stabilize the real economy, then sectoral labor market adjustment cost will lead to welfare loss. However, if monetary policy such as fixed exchange rates cannot stabilize real variables, then some degree of labor market friction will improve welfare instead and the gain will be significant. As a result, the welfare gap between flexible exchange rates and fixed exchange rates decreases with sectoral labor market friction. This is because the friction can offset some of the nominal rigidity and become a substitute for monetary policy to stabilize the real economy.     

Real and nominal effective exchange rates in MENA countries: 1970–2004

The main purposes of this article are 3-fold. First, we construct measures of real and nominal effective exchange rates for 14 Middle East and North African countries over the 1970–2004 period. Second, we test the validity of the Purchasing Power Parity (PPP) by applying the ADF and KPSS tests to the real effective exchange rates. Finally, we employ the bounds testing approach to cointegration and error-correction modelling to show that nominal devaluation leads to real devaluation in the short-run as well as in the long-run in many of the countries.     

The effects of government spending shocks on the real exchange rate and trade balance in Turkey

The aim of this study is to investigate the effects of government spending shocks on the real exchange rate and foreign trade balance in Turkey for the period of 2002:01–2012:04 within a structural VAR framework. The analysis shows that a positive shock to the government spending tends to induce real exchange rate appreciation and deterioration in trade balance. We also find that the composition of the government spending matters. Although shocks to the government nonwage consumption generate an appreciation in the real exchange rate and worsening of the trade balance, the effects of government investment shocks remain insignificant. Furthermore, the analysis demonstrates that shocks to government spending are associated with a rise in taxes, which is indicative of a spending-driven tax adjustment process in Turkey.     

购买力平价偏离理论综述

购买力平价说是一种基本的汇率决定理论,但影响购买力平价关系成立的短期或长期经济因素众多,从而使得实际汇率经常偏离平价关系.本文对有关文献中各种购买力平价偏离模型进行了综合分析,阐明了生产率、政府支出、货币供给、偏好需求和定价策略等基本因素作用于实际汇率的经济机制.     

Are Indian rice exporters able to price discriminate? Empirical evidence for basmati and non-basmati rice

The role of exchange rate fluctuations on the pricing behaviour of Indian rice exporters in their major destination markets is examined using the pricing-to-market (PTM) model. The analysis was undertaken in a context where India has emerged as a leading exporter of rice in the world market. The study distinguishes between basmati and non-basmati rice in the analysis as the destination markets differ across these two varieties. One of the key contributions of this study is that it undertakes an analysis under 3 exchange rate models, they are: nominal, real and commodity-specific exchange rates. The results from our analysis indicated the presence of non-competitive pricing behaviour of India’s rice exporters in majority of destination markets due to both the market-specific characteristics as well as exchange rate-induced effects. The amplification of exchange rate effects was more prominent in commodity-specific exchange rate model whereas local currency stabilization was more prominent under nominal and real exchange rate models. Furthermore, the analysis showed that the commodity-specific exchange rate better predicts the PTM behaviour of rice exporters.