The effects of government spending on consumption and the real exchange rate: a comparison between developed and developing countries

Abstract

Purpose

The degree of development and the way to identify a fiscal shock matter in evaluating the effects of the fiscal policy. This paper contributes to the debate on the effects of a fiscal expansion on private consumption and the real effective exchange rate.

Design/methodology/approach

This paper uses a sign-restriction method to identify a fiscal shock in the panel structural VAR analysis in the context of both developed and developing countries.

Findings

The authors’ find that (1) private consumption increases in response to a positive government spending shock in both groups, yet such consumption effect is greater in developing than industrial countries; (2) the response of real effective exchange rate to the government spending shock varies across groups: it depreciates in developed countries and appreciates in developing countries; (3) trade balance improves in both groups.

Originality/value

This study sheds light on the differential effects of fiscal shock on consumption and real exchange rate in both developed and developing economies.

Citation

Li, Y. and Zhu, X. (2023), "The effects of government spending on consumption and the real exchange rate: a comparison between developed and developing countries", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-11-2020-1395