Credit Cycles, Fiscal Policy, and Global Imbalances

54 Pages Posted: 26 May 2021

See all articles by Callum Jones

Callum Jones

Board of Governors of the Federal Reserve System

Pau Rabanal

International Monetary Fund

Date Written: February 1, 2021

Abstract

We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.

JEL Classification: C52, C54, F41

Suggested Citation

Jones, Callum and Rabanal, Pau, Credit Cycles, Fiscal Policy, and Global Imbalances (February 1, 2021). IMF Working Paper No. 2021/043, Available at SSRN: https://ssrn.com/abstract=3852771

Callum Jones (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Pau Rabanal

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
41
Abstract Views
297
PlumX Metrics