Working Paper: NBER ID: w4809
Authors: Graciela L. Kaminsky; Michael Klein
Abstract: We study the determinants of the dollar/pound real exchange rate from 1879 to 1914 focusing on the role of fiscal policy. We present a simple dynamic model of the real exchange rate to frame our analysis. The econometric results are based upon the decomposition of the sources of the innovation of the real exchange rate drawn from a structural vector autoregression model. We find little evidence that changes in tariffs and government spending affected the real exchange rate. There is some stronger empirical evidence that shocks to deficits were associated with the fluctuations in the real exchange rate.
Keywords: real exchange rate; fiscal policy; gold standard; structural vector autoregression
JEL Codes: F31; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to government deficits (H69) | fluctuations in the real exchange rate (F31) |
| government deficits (H62) | depreciation of the dollar relative to the pound (F31) |
| changes in tariffs (F19) | real exchange rate (F31) |
| government spending (H59) | real exchange rate (F31) |