Working Paper: CEPR ID: DP7732
Authors: Zeno Enders; Gernot Müller; Almuth Scholl
Abstract: Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identification, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade --whose responses are left unrestricted -- depreciate in response to expansionary government spending shocks and appreciate in response to positive technology shocks.
Keywords: government spending shocks; international transmission mechanism; real exchange rate; sign restrictions; technology shocks; terms of trade; VAR
JEL Codes: E32; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expansionary government spending shocks (E62) | depreciation of the real exchange rate (F31) |
| expansionary government spending shocks (E62) | depreciation of terms of trade (F14) |
| positive technology shocks (O49) | appreciation of the real exchange rate (F31) |
| positive technology shocks (O49) | appreciation of terms of trade (F14) |