Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/207313 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7922
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Under fixed exchange rates, fiscal policy is an effective tool. According to classical views because it impacts the real exchange rate, according to Keynesian views because it impacts output. Both views have merit because the effects of government spending are asymmetric. A spending cut lowers output but does not alter the real exchange rate. A spending increase appreciates the exchange rate but does not alter output unless there is economic slack. We establish these results in a small open economy model with downward nominal wage rigidity and provide empirical evidence on the basis of quarterly time-series data for 38 countries.
Subjects: 
downward nominal wage rigidity
government spending shocks
exchange rate peg
real exchange rate
output
non-linear effects
asymmetric adjustment
JEL: 
E62
F41
F44
Document Type: 
Working Paper
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