The impact of fiscal policy on exchange rates is of key interest to policymakers. This column argues that unexpected government spending instantly affects exchange rates. The finding, based on daily data reporting of the US Defence Department, may suggest that unexpected government spending has broader macroeconomic effects as well. The results, however, do not hold is low-frequency data are used instead.
Alan J Auerbach, Yuriy Gorodnichenko, Sunday, May 10, 2015 - 00:00
Sebastian Gechert, Andrew Hughes Hallett, Ansgar Rannenberg, Thursday, February 26, 2015 - 00:00
Sebastian Gechert, Andrew Hughes Hallett, Ansgar Rannenberg, Wednesday, February 25, 2015 - 00:00
Daniel Gros, Wednesday, March 19, 2014 - 00:00
Since the onset of the sovereign debt crisis, the argument for a system of fiscal transfers to offset idiosyncratic shocks in the Eurozone has gained adherents. This column argues that what the Eurozone really needs is not a system which offsets all shocks by some small fraction, but a system which protects against shocks which are rare, but potentially catastrophic. A system of fiscal insurance with a fixed deductible would therefore be preferable to a fiscal shock absorber that offsets a certain percentage of all fiscal shocks.