Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/235239
Authors: 
Born, Benjamin
D'Ascanio, Francesco
Müller, Gernot J.
Pfeifer, Johannes
Year of Publication: 
2021
Series/Report no.: 
ifo Working Paper No. 352
Abstract: 
In economies with fixed exchange rates, the adjustment to government spending shocks is asymmetric. A fiscal expansion appreciates the real exchange rate but does not stimulate output. A fiscal contraction does not alter the exchange rate, but lowers output. We develop these insights in a two-sector model of a small open economy with downward nominal wage rigidity. We establish new empirical evidence that supports the predictions of the model along several dimensions: not only does the exchange rate regime shape the fiscal transmission mechanism as predicted by the model - in doing so it also interacts with economic slack and inflation.
Subjects: 
Downward nominal wage rigidity
government spending shocks
exchangerate peg
real exchange rate
nonlinear effects
asymmetric adjustment
depreciation bias
JEL: 
E62
F41
F44
Document Type: 
Working Paper

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