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

Abstract

PurposeThe 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/approachThis 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.FindingsThe 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/valueThis study sheds light on the differential effects of fiscal shock on consumption and real exchange rate in both developed and developing economies.