allocation. We develop a two-stage estimation approach and apply it to China's loanlevel data that covers all sectors in the …

real exchange rate, according to Keynesian views because it impacts output. Both views have merit because the effects of … government spending are asymmetric. A spending cut lowers output but does not alter the real exchange rate. A spending increase … appreciates the exchange rate but does not alter output unless there is economic slack. We establish these results in a small open …