UCL Discovery
UCL home » Library Services » Electronic resources » UCL Discovery

Explaining the effects of government spending shocks on consumption and the real exchange rate

Ravn, M.O.; Schmitt-Rohe, S.; Uribe, M.; (2007) Explaining the effects of government spending shocks on consumption and the real exchange rate. (NBER Working Papers 13328). National Bureau of Economic Research: Cambridge, US. Green open access

[img]
Preview
PDF
18842.pdf

Download (237kB)

Abstract

Using panel structural VAR analysis and quarterly data from four industrialized countries, we document that an increase in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance, and a depreciation of the real exchange rate (i.e., a decrease in the domestic CPI relative to the exchange-rate adjusted foreign CPI). We propose an explanation for these observed effects based on the deep habit mechanism. We estimate the key parameters of the deep-habit model employing a limited information approach. The predictions of the estimated deep-habit model fit well the observed responses of output, consumption, the trade balance, and the real exchange rate to an unanticipated government spending shock. In addition, the deep-habit model predicts that in response to an anticipated increase in government spending consumption and wages fail to increase on impact, which is consistent with the empirical evidence stemming from the narrative identification approach. In this way, the deep-habit model reconciles the findings of the SVAR and narrative literatures on the effects of government spending shocks.

Type: Working / discussion paper
Title: Explaining the effects of government spending shocks on consumption and the real exchange rate
Open access status: An open access version is available from UCL Discovery
Publisher version: http://www.nber.org/papers/w13328
Language: English
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/18842
Downloads since deposit
158Downloads
Download activity - last month
Download activity - last 12 months
Downloads by country - last 12 months

Archive Staff Only

View Item View Item