The Asymmetric Effects of Argentina?s Fiscal Deficits on the Real Exchange Rate

OVIEDO JORGE MAURICIO

Emerging Markets Finance and Trade

M.E. Sharpe Inc.

Año: 2022 vol. 58 p. 2567 - 2567

1540-496X

ccording to standard theoretical frameworks such as Real Business Cycle(RBC?s) models or new-Keynesian theories, the real exchange rate shouldappreciate in response to an increase in government spending. However, theempirical literature finds mixed results. We offer an answer to this puzzle byanalyzing the impact of the composition of the fiscal deficit. Using a dynamicstochastic general equilibrium model with a government and an externalsector, we quantify the differential impact on the real exchange rate generatedby an increase in public consumption expenditure, public investment,and tax reduction. We calibrate and simulate the model for Argentina andfind that the fiscal deficit originated in tax reduction can improve the realexchange rate. In contrast, one generated by an increase in spending deteriorates the real exchange rate. In particular, this depreciation is more significant when the spending is directed toward public consumption thanwhen used for public investment. We argue