Government spending, the exchange rate and growth: empirical evidence for Latin America

Vol. 41 No. 4 (2021)

Out-Dez/2021
Published November 11, 2021
PDF-English
PDF-English

How to Cite

Cruz, Moritz, and Josue Zavaleta. 2021. “Government Spending, the Exchange Rate and Growth: Empirical Evidence for Latin America”. Brazilian Journal of Political Economy 41 (4):637-56. https://doi.org/10.1590/0101-31572021-3030.

Government spending, the exchange rate and growth: empirical evidence for Latin America

Moritz Cruz
Universidad Nacional Autónoma de México, Instituto de Investigaciones Económicas, Coyoacán, Mexico.
Josue Zavaleta
Benemérita Universidad Autónoma de Puebla, Facultad de Economía, Puebla, México.
Brazilian Journal of Political Economy, Vol. 41 No. 4 (2021), Out-Dez/2021, Pages 637-656

Abstract

Using data of selected economies of Latin America for the period 1990-2017, this
paper aims to provide empirical evidence regarding the effect of disaggregate government
spending in the exchange rate. Our results indicate that government investment depreciates
the exchange rate whereas government consumption, on the other hand, appreciates it. Both
effects are, however, rather small. Our findings support recent literature showing that the
relationship among government spending and the exchange rate is ambiguous, challenging
the general accepted idea that government spending inevitably appreciates the exchange rate,
having thus negative effects on the tradable sector and on growth. Overall, our results allow
us to suggest that growth can be stimulated particularly via government investment without
detrimental effects on the exchange rate.

JEL Classification: 011; 025; E12; E62.


Keywords: Government spending exchange rate industrial policy growth and development Latin America