real exchange rate, according to Keynesian views because it impacts output. Both views have merit because the effects of … government spending are asymmetric. A spending cut lowers output but does not alter the real exchange rate. A spending increase … appreciates the exchange rate but does not alter output unless there is economic slack. We establish these results in a small open …

appreciates the real exchange rate but does not stimulate output. A fiscal contraction does not alter the exchange rate, but … lowers output. We develop these insights in a two-sector model of a small open economy with downward nominal wage rigidity …

in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance … fit 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 …

in government purchases leads to an expansion in output and private consumption, a deterioration in the trade balance … fit 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 …