This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange‐rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff ([M. Obstfeld, 1995]). We show that the joint...

A defining stylized fact associated with exchange-rate-based (ERB) stabilization programs is that their initial phase is characterized by several years of expansion in private consumption and a gradual appreciation of the real exchange rate. In this paper, I argue that standard optimizing models...