Expansionary Fiscal Shocks and the Trade Deficit

Christopher John Erceg and Luca Guerrieri ()

No 128, Computing in Economics and Finance 2005 from Society for Computational Economics

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: DGE Models; Open-Economy Macroeconomics (search for similar items in EconPapers)
JEL-codes: F32 F41 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-int and nep-mac
Date: 2005-11-11
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Working Paper: Expansionary fiscal shocks and the trade deficit (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:sce:scecf5:128

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