Fiscal policy and the real exchange rate: some evidence from Spain

Abstract

The factors influencing the real exchange rate are an important issue for a country’s price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-à-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be relevant for the results.

This is a preview of subscription content, access via your institution.

Fig. 1

Source: Ministry of Economy and Competitiveness

Fig. 2

Source: Ministry of Economy and Competitiveness

Notes

  1. 1.

    The critical values for the Cμ statistic are 0.208, 0.121 and 0.094, at the 1%, 5% and 10% significance levels, respectively; and are taken from Shin (1994), Table 1, for m = 4.

  2. 2.

    The critical values for the Cμ statistic are now 0.158, 0.097 and 0.075, at the 1%, 5% and 10% significance levels, respectively; see Shin (1994), Table 1, for m = 5.

References

  1. Afonso A, Sousa RM (2012) The macroeconomic effects of fiscal policy. Appl Econ 44:4439–4454

    Article  Google Scholar 

  2. Bajo-Rubio O, Díaz-Roldán C, Esteve V (2004) Searching for threshold effects in the evolution of budget deficits: an application to the Spanish case. Econ Lett 82:239–243

    Article  Google Scholar 

  3. Bajo-Rubio O, Díaz-Roldán C, Esteve V (2006) Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain. J Macroecon 28:596–608

    Article  Google Scholar 

  4. Balassa B (1964) The purchasing power parity doctrine: a reappraisal. J Polit Econ 72:584–596

    Article  Google Scholar 

  5. Barrios S, Langedijk S, Pench L (2010) EU fiscal consolidation after the financial crisis. Lessons from past experiences. European Economy, Economic Papers 418, Directorate-General for Economic and Financial Affairs, European Commission

  6. Bénétrix AS, Lane PR (2013) Fiscal shocks and the real exchange rate. Int J Cent Bank 9:6–37

    Google Scholar 

  7. Bergstrand JH (1991) Structural determinants of real exchange rates and national price levels: some empirical evidence. Am Econ Rev 81:325–334

    Google Scholar 

  8. Blanchard OJ, Perotti R (2002) An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Quart J Econ 117:1329–1368

    Article  Google Scholar 

  9. Burriel P, De Castro F, Garrote D, Gordo E, Paredes J, Pérez JJ (2010) Fiscal policy shocks in the euro area and the US: an empirical assessment. Fiscal Studies 31:251–285

    Article  Google Scholar 

  10. Çebi C, Çulha AA (2014) The effects of government spending shocks on the real exchange rate and trade balance in Turkey. Appl Econ 46:3151–3162

    Article  Google Scholar 

  11. Chatterjee S, Mursagulov A (2016) Fiscal policy and the real exchange rate. Macroecon Dyn 20:1742–1770

    Article  Google Scholar 

  12. Chinn MD (1999) Productivity, government spending and the real exchange rate: evidence for OECD countries. In: MacDonald R, Stein J (eds) Equilibrium exchange rates. Kluwer Academic Publishers, Boston, pp 163–190

    Google Scholar 

  13. De Castro F (2006) The macroeconomic effects of fiscal policy in Spain. Appl Econ 38:913–924

    Article  Google Scholar 

  14. De Castro F, Fernández L (2013) The effects of fiscal shocks on the exchange rate in Spain. Econ Soc Rev 44:151–180

    Google Scholar 

  15. De Castro F, Garrote D (2015) The effects of fiscal shocks on the exchange rate in the EMU and differences with the USA. Empir Econ 49:1341–1365

    Article  Google Scholar 

  16. De Castro F, Hernández de Cos P (2008) The economic effects of fiscal policy: the case of Spain. J Macroecon 30:1005–1028

    Article  Google Scholar 

  17. De Grauwe P, Ji Y (2013) Panic-driven austerity in the Eurozone and its implications, VoxEU.org, 21 February 2013. http://www.voxeu.org/article/panic-driven-austerity-eurozone-and-its-implications

  18. De Gregorio J, Giovannini A, Wolf HC (1994) International evidence on tradables and nontradables inflation. Eur Econ Rev 38:1225–1244

    Article  Google Scholar 

  19. Enders Z, Müller G, Scholl A (2011) How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States. J Int Econ 83:53–69

    Article  Google Scholar 

  20. Estrada A, López-Salido JD (2004) Understanding Spanish dual inflation. Investigaciones Económicas 28:123–140

    Google Scholar 

  21. Froot KA, Rogoff K (1991) The EMS, the EMU, and the transition to a common currency. NBER Macroecon Annu 6:269–327

    Article  Google Scholar 

  22. Galstyan V, Lane PR (2009a) The composition of government spending and the real exchange rate. J Money Credit Bank 41:1233–1249

    Article  Google Scholar 

  23. Galstyan V, Lane PR (2009b) Fiscal policy and international competitiveness: evidence from Ireland. Econ Soc Rev 40:299–315

    Google Scholar 

  24. Kejriwal M, Perron P (2008) The limit distribution of the estimates in cointegrated regression models with multiple structural changes. J Econom 146:59–73

    Article  Google Scholar 

  25. Kejriwal M, Perron P (2010) Testing for multiple structural changes in cointegrated regression models. J Bus Econ Stat 28:503–522

    Article  Google Scholar 

  26. Kim S, Roubini N (2008) Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the US. J Int Econ 74:362–383

    Article  Google Scholar 

  27. Kollmann R (2010) Government purchases and the real exchange rate. Open Econ Rev 21:49–64

    Article  Google Scholar 

  28. Kwiatkowski D, Phillips PCB, Schmidt P, Shin Y (1992) Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? J Econom 54:159–178

    Article  Google Scholar 

  29. MacKinnon JG (1996) Numerical distribution functions for unit root and cointegration tests. J Appl Econom 11:601–618

    Article  Google Scholar 

  30. Marcellino M (2006) Some stylized facts on non-systematic fiscal policy in the euro area. J Macroecon 28:461–479

    Article  Google Scholar 

  31. Ministerio de Economía, Industria y Competitividad (2017) Nota Metodológica Índice de Tendencia de Competitividad. May. http://www.comercio.gob.es/es-ES/comercio-exterior/estadisticas-informes/PDF/estadisticas-comercio-exterior/ITC%20I%20trim%2017/Nota%20Metodológica%20Índices%20de%20Tendencia%20de%20Competitividad_2017.pdf

  32. Monacelli T, Perotti R (2010) Fiscal policy, the real exchange rate and traded goods. Econ J 120:437–461

    Article  Google Scholar 

  33. Mountford A, Uhlig H (2009) What are the effects of fiscal policy shocks? J Appl Econom 24:960–992

    Article  Google Scholar 

  34. Myro R (ed) (2013) Fortalezas competitivas y sectores clave en la exportación española. Instituto de Estudios Económicos, Madrid

    Google Scholar 

  35. Obstfeld M, Rogoff K (1995) Exchange rate dynamics redux. J Polit Econ 103:624–660

    Article  Google Scholar 

  36. Obstfeld M, Rogoff K (1996) Foundations of international macroeconomics. The MIT Press, Cambridge, MA

    Google Scholar 

  37. Phillips PCB, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75:335–346

    Article  Google Scholar 

  38. Ravn MO, Schmitt-Grohé S, Uribe M (2012) Consumption, government spending, and the real exchange rate. J Monet Econ 59:215–234

    Article  Google Scholar 

  39. Ricci LA, Milesi-Ferretti GM, Lee J (2013) Real exchange rates and fundamentals: a cross-country perspective. J Money Credit Bank 45:845–865

    Article  Google Scholar 

  40. Samuelson PA (1964) Theoretical notes on trade problems. Rev Econ Stat 46:145–154

    Article  Google Scholar 

  41. Shin Y (1994) A residual-based test of the null of cointegration against the alternative of no cointegration. Econ Theory 10:91–115

    Article  Google Scholar 

  42. Stock JH, Watson MW (1993) A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica 61:783–820

    Article  Google Scholar 

Download references

Acknowledgements

Funding was provided by Ministerio de Economía y Competitividad (ES) through Grants No. ECO2016-78422-R (O. Bajo-Rubio) and No. ECO2017-83255-C3-3-P (V. Esteve).

Author information

Affiliations

Authors

Corresponding author

Correspondence to Oscar Bajo-Rubio.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Bajo-Rubio, O., Berke, B. & Esteve, V. Fiscal policy and the real exchange rate: some evidence from Spain. Empirica 47, 267–280 (2020). https://doi.org/10.1007/s10663-018-9415-9

Download citation

Keywords

  • Real exchange rate
  • Government consumption
  • Government investment

JEL Classification

  • E62
  • F31
  • F41