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

Luca Gambetti

No 505, Working Papers from Barcelona School of Economics

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 considered 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 nonfundamental for the variables typically used in open economy VARs.

Keywords: current account; fiscal policy; Structural factor model; twin deficits; trade deficit; Mundell-Fleming (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Date: 2015-09
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Citations: View citations in EconPapers (2)

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Working Paper: Fiscal Policy, Foresight and the Trade Balance in the U.S (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:505

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