Expansionary Fiscal Shocks and the US Trade Deficit

By C. Erceg, Luca Guerrieri, Christopher J. Gust. 2005

178 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7b41dfecdca13488e61f08fec8fcc8f82d0ef707

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

DSGE Models and Central Banks (2009, unknown): “For applications of such approach at central banks see Erceg et al (2005), Forni et al (2009) or www.economics-ejournal.org”
A Bayesian Look at New Open Economy Macroeconomics (2005, methodology): “Examples include the SIGMA model of the Federal Reserve Board of Governors (see Erceg, Guerrieri, and Gust, 2005) and the Global Economic Model (GEM) of the International Monetary Fund (see Laxton and Pesenti, 2003).”
How Do Fiscal and Technology Shocks Affect Real Exchange Rates? New Evidence for the United States (2008, unknown): “1 See, e.g., Backus et al. (1994) and Erceg et al. (2005).”
The global saving glut and the U.S. current account deficit (2005, background): “Indeed, a recent study suggests that a 1/27/2017https://www.federalreserve.gov/boarddocs/speeches/2005/20050... one-dollar reduction in the federal budget deficit would cause the current account deficit to decline less than 20 cents (Erceg, Guerrieri, and Gust, 2005).”
The general equilibrium effects of fiscal policy: Estimates for the Euro area (2007, unknown): “We consider the following budget constraint: [ Bt+1 Rt −Bt ] = C t + Wtl g t + Trt − Tt (16)”
Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut" (2007, unknown): “19 This finding is similar to the finding of Erceg et al. (2005) whose simulation results show the coefficient of the budget balance is around 0.20.”
Fiscal Policy, the Trade Balance, and the Real Exchange Rate: Implications for International Risk Sharing (2007, methodology): “Recently Erceg et al. (2005) analyze the e¤ects of scal shocks on the trade balance and the real exchange rate in a last-generation NOEM model. Their model is parameterized to the US economy and includes several market frictions that are considered important for the ability of prototypical DSGE mod”
Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US (2008, methodology): “…variants such as Dornbusch (1976), and calibrated international real business cycle models with investment such as Baxter, 1995; Kollmann, 1998, and Erceg, Guerrieri, and Gust (2005) tend to provide such predictions in most cases, although the precise effects depend on various factors such as the…”
Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings (2008, background): “5 See Erceg et al. (2005).”
Fiscal Policy, the Real Exchange Rate and Traded Goods (2010, unknown): “In the models of Galı́ et al. (2007) and Erceg et al. (2005), the positive response of aggregate consumption is due to the ROT agents; however the consumption of the forwardlooking agents still declines because of the negative wealth effect on labour supply.”
SIGMA: a new open economy model for policy analysis (2005, unknown): “26We provide a more detailed discussion of the effects on the trade deficit in Erceg, Guerrieri, and Gust (2005). induce households to work more by raising the cost of leisure, and the rise in labor supply in turn encourages capital accumulation.”