Expansionary Fiscal Shocks and the US Trade Deficit

In this paper, we use a dynamic general equilibrium model of an open economy to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labour income...

Full description

Saved in:
Bibliographic Details
Published inInternational finance (Oxford, England) Vol. 8; no. 3; pp. 363 - 397
Main Authors Erceg, Christopher J., Guerrieri, Luca, Gust, Christopher
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishing Ltd 01.12.2005
Wiley-Blackwell
Wiley Blackwell
SeriesInternational Finance
Subjects
Außenwirtschaftliches Gleichgewicht
Balance of trade
Budget deficits
Dynamisches Gleichgewicht
Economic impact
Finanzpolitik
GDP
Gross Domestic Product
Handelsbilanz
Neue Makroökonomik offener Volkswirtschaften
Studies
Tax rates
Trade deficit
USA
United States > US
Online AccessGet full text
ISSN1367-0271
1468-2362
DOI10.1111/j.1468-2362.2005.00164.x

Cover

More Information
Summary:In this paper, we use a dynamic general equilibrium model of an open economy to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labour income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the US trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of 1 percentage point of gross domestic product (GDP) induces the trade balance to deteriorate by 0.2 percentage point of GDP or less. Noticeably larger effects are only likely to be elicited under implausibly high values of the short‐run trade price elasticity, or of the share of liquidity‐constrained households in the economy. From a policy perspective, our analysis suggests that even reducing the current US fiscal deficit (of 3% of GDP) to zero would be unlikely to narrow the burgeoning US trade deficit significantly.
Bibliography:ark:/67375/WNG-QL6ZB3WS-Z
istex:9A90476C317A354752AC32E2AA91F4075ED83181
We thank Matthieu Bussière, Michele Cavallo (discussant), William Cline, Fabio Ghironi (the editor), Douglas Laxton, Gian Maria Milesi-Ferretti, Steven Kamin, Paolo Pesenti, Benn Steil (the editor) and Edwin Truman, as well as seminar participants at the Bank of Canada, the Council on Foreign Relations, the Congressional Budget Office, the Federal Reserve Board, Georgetown University, George Washington University and the International Monetary Fund. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
ArticleID:INFI164
*
We thank Matthieu Bussière, Michele Cavallo (discussant), William Cline, Fabio Ghironi (the editor), Douglas Laxton, Gian Maria Milesi‐Ferretti, Steven Kamin, Paolo Pesenti, Benn Steil (the editor) and Edwin Truman, as well as seminar participants at the Bank of Canada, the Council on Foreign Relations, the Congressional Budget Office, the Federal Reserve Board, Georgetown University, George Washington University and the International Monetary Fund. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 14
ISSN:1367-0271
1468-2362
DOI:10.1111/j.1468-2362.2005.00164.x