This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange‐rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff ([M. Obstfeld, 1995]). We show that the joint...

Contrary to widespread empirical evidence, standard NOEM models imply that the real exchange rate appreciates following an increase in public spending. This paper introduces productive government purchases and shows that the real exchange rate can depreciate after a positive spending shock, thus...

We study the effects of expansionary fiscal shocks in a two-country DSGE model with perpetual youth. We consider two alternative financing regimes, monetary financing and debt financing, and find that a money-financed fiscal stimulus is more expansionary on output and inflation. We investigate...