Expansionary Fiscal Shocks and the Trade Deficit

50 Pages Posted: 5 Feb 2005

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Luca Guerrieri

Board of Governors of the Federal Reserve System

Christopher Gust

Board of Governors of the Federal Reserve System

Date Written: January 2005

Abstract

In this paper, we use an open economy DGE model (SIGMA) to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity.

Keywords: DGE model, open-economy macroeconomics

JEL Classification: F32, F41, E62

Suggested Citation

Erceg, Christopher J. and Guerrieri, Luca and Gust, Christopher, Expansionary Fiscal Shocks and the Trade Deficit (January 2005). Available at SSRN: https://ssrn.com/abstract=661424 or http://dx.doi.org/10.2139/ssrn.661424

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

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Luca Guerrieri (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2550 (Phone)

Christopher Gust

Board of Governors of the Federal Reserve System ( email )

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

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