Explaining the effects of government spending shocks on consumption and the real exchange rate
By: Morten O. Ravn, Stephanie Schmitt-Grohé, Martin Uribe.
Contributors: Schmitt-Grohe, Stephanie.; Uribe, Martin.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13328.; Working paper series (National Bureau of Economic Research) -- working paper no. 13328.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Format: Electronic resource
Number of pages: 34
Subjects: Government spending policy; Consumption (Economics) -- Econometric models; Foreign exchange rates -- Econometric models
Description: Using structural VAR analysis, we document that in a panel of industrialized countries, an increase in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance, and a depreciation of the real exchange rate (i.e., a decrease in the domestic CPI relative to the exchange-rate adjusted foreign CPI). We propose an explanation for these observed effects based on the deep habit mechanism. We estimate the key parameters of the deep-habit model employing a limited information approach. The predictions of the estimated deep-habit model fit remarkably well the observed responses of output, consumption, the trade balance, and the real exchange rate to an unanticipated government spending shock. In addition, the deep-habit model predicts that in response to an anticipated increase in government spending consumption and wages fail to increase on impact, which is consistent with the empirical evidence stemming from the narrative identification approach. In this way, the deep-habit model reconciles the findings of the SVAR and narrative literatures on the effects of government spending shocks.
Notes: "August 2007"

Includes bibliographical references (p. 33-34).

Also available in PDF from the NBER World Wide Web site (www.nber.org).