The Effects of Government Spending Shocks on the Real Exchange Rate and Trade Balance in Turkey

This study aims to investigate the e�ects of government spending shocks on the real exchange rate and foreign trade balance in Turkey for the period of 2002.I - 2012.IV within a structural VAR framework. The analysis shows that a positive shock to government spending tends to induce real exchange rate appreciation and deterioration in trade balance. We also ?nd that composition of the government spending matters. While shocks to government non-wage consumption generate an appreciation in the real exchange rate and worsening of the trade balance, e�ects of government investment shocks remain insignificant. Furthermore, the analysis demonstrates that shocks to government spending are associated with a rise in taxes, which points to the existence of a spending- driven tax adjustment process in Turkey.