The Effects Of Government Spending On Real Exchange Rate

After World War II,the economic exchanges between the countries in the world are increasing,and the process of economic globalization is speeding up.Macroeconomic operation of countries will inevitably be affected by the global economic situation and macroeconomic policy will affect each other.In the periods of recession,countries will use fiscal policy and monetary policy to stimulate the economy.In the economic globalization,a country's economy is not only affected by the domestic economic policy,but also by other countries' economic policies.The real exchange rate,as a measure of the relative price of the two countries,reflects the competitiveness of a country,but also by the impact of national economic policies.Will government spending affect the real exchange rate?The academia has not yet come to a unified conclusion.Based on local projection,we use the data set of 29 OECD countries to find out the effect of government spending which include government consumption and government investment on real exchange rates and other macroeconomic variables.To do the robustness test,I try to control for short-term interest rate and GDP deflator and different time lag.We document that an increase in government spending appreciate private consumption;exchange rate regime and the openness of economy along with country size will affect the response to government consumption and investment spending shock in a certain extent effect;different kind of government spending have different effects on real exchange rate and other macroeconomic variables.