Abstract
This paper implements a structural vector auto regression (SVAR) analysis to investigate the impacts and importance of fiscal shocks on the dynamics of the real exchange rate and the trade balance in three emerging economies: Brazil, Chile and Mexico. We show that the effects of an unexpected increase in government spending are not uniform across countries with higher spending leading to a depreciation of the real exchange rate in Brazil and Chile, whereas in Mexico, we observe an appreciation. The trade balance deteriorates in all three countries. We also report that an unexpected increase in taxes leads to recessionary impacts and improves the trade balance. Only in Mexico is there evidence of a real exchange rate depreciation. Finally, we show that fiscal shocks account for roughly 20% of real exchange fluctuations.
Acknowledgments
We thank Tiago Cavalcanti (the editor), participants at the 34th Meeting of the Brazilian Econometric Society and an anonymous referee for useful comments. We are responsible for any remaining error. Part of this paper was written when Marcelo was a CAPES Foundation, Ministry of Education of Brazil, Research Fellow – Proc. No BEX 1920/14-6 – at the Faculty of Economics – University of Cambridge. Marcelo is grateful to both the CAPES Foundation for its support and the Faculty of Economics staff for their warm hospitality.
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