Narrowing the US twin deficits: simulations with a world macroeconometric model

Alberto Bagnai, Silvia Galli, Eleonora Pierucci and Simone Raimondi
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Silvia Galli: Department of Public Economics, University of Rome I
Eleonora Pierucci: Department of Economic Sciences, University of Rome I
Simone Raimondi: Department of Public Economics, University of Rome I

International Trade from EconWPA

Abstract: In this paper we extend the macroeconometric model developed in Bagnai (2004) by linking it to a submodel for the Japanese economy, and we utilize this extended model to investigate several hypotheses of reduction in the US twin deficits. The Japanese submodel is specified and estimated along the lines set out in Bagnai and Carlucci (2003), using the “cointegration with endogenous structural break” estimation method of Gregory and Hansen (1996). The estimation results show that the Japanese economy underwent a major structural change after the first oil-price shock. The “twin deficits” simulations consider two policy instruments: a US dollar exchange rate devaluation, and a fiscal consolidation, carried out through a decrease in US government consumption. We analyze both different sizes and different timing of these policy measures, as well as their interactions, in order to evaluate their effectiveness, and the costs they impose on the partner countries (in particular, on the Euro area and Japan).

Keywords: twin deficits; structural break; econometric model; Japan; EMU; USA (search for similar items in EconPapers)
JEL-codes: C53 F42 F47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-ifn
Date: Written 2004-11-14
Note: Type of Document - pdf; pages: 46
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