Consumption,governmentspending,andtherealexchangerate

UsingpanelstructuralVARanalysisandquarterlydatafromfourindustrialized countries,wedocumentthatanincreaseingovernmentpurchasesraisesoutputand private consumption,deterioratesthetradebalance,anddepreciatestherealexchange rate.ThispatternofcomovementposesapuzzleforbothneoclassicalandKeynesian models.Anexplanationbasedonthedeep-habitmechanismisproposed.Anestimated two-countrymodelwithdeep-habitsisshowntoreplicatewelltheobservedresponses of output,consumption,andthetradebalance,andtheinitialresponseofthereal exchangeratetoanestimatedgovernmentspendingshock