Understanding the dynamic effects of government spending on foreign trade
نویسنده
چکیده
Using Vector Autoregressions on U.S. time series, the present paper documents the effects of fiscal policy on foreign trade: an increase in government spending significantly depreciates the nominal exchange rate, appreciates the terms of trade and increases net exports. Exposed to the same spending shock, a New Keynesian general equilibrium model is shown to match qualitatively the response of relative prices. The response of net exports, in contrast, depends on the intraand intertemporal elasticities of substitution and the degree of home bias in private spending. An accommodating monetary policy dampens, but does not alter the response of net exports. 2008 Elsevier Ltd. All rights reserved. JEL classification: E62; F41; F42
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