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

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  • Luca Gambetti

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.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 505.

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Date of creation: Sep 2010
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Handle: RePEc:bge:wpaper:505

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Keywords: Structural factor model; fiscal policy; twin deficits; trade deficit; current account; Mundell-Fleming;

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Cited by:
  1. Forni, Mario & Gambetti, Luca, 2011. "Testing for Sufficient Information in Structural VARs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8209, C.E.P.R. Discussion Papers.
  2. Mario Forni & Luca Gambetti, 2011. "Sufficient information in structural VARs," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 062, University of Modena and Reggio E., Dept. of Economics.

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