Government Spending Shocks and External Competitiveness: Evidence from South Africa

Abstract

This study examines the effects of government spending shocks on real effective exchange rate in South Africa over the period 1970Q1–2019Q2. In doing so, a version of vector autoregressive impulse response model developed by Jordà is employed and the shocks are identified recursively. The impulse responses show that government spending shock has a significant appreciation effect on real effective exchange rate and its effect depends on the nature of the fiscal shock. Although the effect of government spending on real effective exchange rate does not depend on the sign of the shock, it varies over economic cycle.