Working Paper: NBER ID: w21100
Authors: Alan J. Auerbach; Yuriy Gorodnichenko
Abstract: While theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have been stubbornly finding depreciation. Using daily data on U.S. defense spending (announced and actual payments), we document that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. We examine responses of other variables at the daily frequency and explore how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times.
Keywords: Fiscal policy; Exchange rates; Government spending
JEL Codes: E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated shocks to announced military spending (H56) | appreciation of the U.S. dollar (F31) |
| actual payments on military programs (H56) | no discernible effect on the exchange rate (F31) |
| fiscal variables (E62) | forward-looking variables (C39) |
| fiscal shocks (E62) | changes in exchange rates (F31) |
| fiscal shocks (E62) | spillovers into foreign economies (F69) |