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Trade Flows and Fiscal Multipliers

Matteo Cacciatore () and Nora Traum ()

No 27652, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present novel insights on the role of international trade following unanticipated government spending and income tax changes in a flexible exchange rate environment. In a simple two-country, two-good model, we show analytically that fiscal multipliers can be larger in economies more open to trade, even when fiscal expansions imply a trade deficit. Cross-country comovement can be positive or negative. Three factors determine how trade linkages affect fiscal multipliers: the relative import share of public and private goods, how the government finances its budget, and the currency invoicing of exports. A Bayesian prior-predictive analysis shows a quantitative international business-cycle model bears the same predictions. Estimating the model on Canadian and U.S. data, we find support for larger multipliers relative to a counterfactually closed economy and positive cross-country spillovers.

JEL-codes: E2 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-mac and nep-opm
Note: IFM
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