Fiscal policy and the real exchange rate: some evidence from Spain

The factors influencing the real exchange rate are an important issue for a country's price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-a-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be relevant for the results.