Expansionary fiscal shocks and the trade deficit

Christopher John Erceg, Luca Guerrieri () and Christopher Gust

No 825, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, we use an open economy DGE model (SIGMA) 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 labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. 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 one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity.

Keywords: Balance of trade; Budget deficits (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-int
Date: 2005
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Working Paper: Expansionary Fiscal Shocks and the Trade Deficit (2005)
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