Fiscal announcements and real exchange rate dynamics

This paper examines the dynamic impact of anticipated government spending on real exchange rates in a general-equilibrium framework. I show that an increase in government spending causes persistent movements in real exchange rates, and that the time profile of real exchange rates differs with patterns of government spending. Hence, one of the explanations for the misalignment and excess volatility of real exchange rates during the flexible exchange rate system may be volatile changes in government spending.