Abstract:
The study focuses on the impact of fiscal policy in the open economy framework. We find how does government spending and specifically the military spending affect aggregate economic activity and through which channel this effect is transmitted. The analytical part uses a panel data from 30 countries for the period of 2000-2018. We examine the impact of change in government spending on the real effective exchange rate, current account balance, and private consumption. The empirical models are estimated separately for peaceful and war ridden countries and for countries from African and Asian continents. We discuss potential sources of the differences between war and peaceful countries in the responses to spending shocks. The finding indicate that due to military spending shock the response of real effective exchange rate and current account is more in peaceful countries but private consumption is more responsive in war ridden countries. The study also investigate that real effective rate of exchange is appreciating in both Asian and African countries. But the African countries respond more to the military spending shock. However, the current account deteriorates in Asian countries more than African countries, as the share of trade balance is high in Asian countries. Consumption level is higher in Asian countries as compared with African. Military spending and war in these region pay surprisingly adverse cost. The study concludes with some policy recommendations and suggestions that may be helpful for future studies.
