Twin Deficits, Openness and the Business Cycle

Giancarlo Corsetti and Müller, Gernot
Authors registered in the RePEc Author Service: Gernot J. Müller

No 6492, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we study the co-movement of the government budget balance and the trade balance at business cycle frequencies. In a sample of 10 OECD countries we find that the correlation of the two time series is negative, but less so in more open economies. Moreover, for the US the cross-correlation function is S-shaped. We analyze these regularities taking the perspective of international business cycle theory. First, we show that a standard model delivers predictions broadly in line with the evidence. Second, we show that conditional on spending shocks the model predicts a perfect correlation of the budget balance and the trade balance. Yet, the effect of spending shocks on the trade balance is contained if an economy is not very open to trade.

Keywords: Business cycle; Fiscal policy; Openness; Twin deficits (search for similar items in EconPapers)
JEL-codes: E32 F41 F42 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-bec, nep-cba, nep-int and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Twin Deficits, Openness, and the Business Cycle (2008)
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