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Fiscal Policy, Foresight and the Trade Balance in the U.S

Luca Gambetti ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: This paper investigates the effects of fiscal policy on the trade balance using a structural factor model. A fiscal policy shock worsens the trade balance and produces an appreciation of the domestic currency but the effects are quantitatively small. The findings match the theoretical predictions of the standard Mundell-Fleming model, although fiscal policy should not be con- sidered one of the main causes of the large US external deficit. My conclusions differ from those reached using VAR models since the fiscal shock, possibly due to fiscal foresight, is nonfunda- mental for the variables typically used in open economy VARs.

Keywords: structural factor model; fiscal policy; twin deficits; trade deficit; current account; Mundell-Fleming. (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Pages: 26
Date: 2010-09-01
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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