The US “Twin Deficits”. A Reappraisal
AbstractSince the mid-1980s, an extensive empirical literature has investegated the relationship between the US fiscal and trade deficits without reaching any consensus. Two elements may account for these conflicting results. First, considering data in levels versus stationarized data has an impact on conclusions. Moreover, the link between the US next exports and govenment balance, whether stationarized or not, is unsteady. This lack of robustness may stem from changes in the relative contribution of demand and supply shocks in the US economy : demand shocks generate a positive correlation between trade and fiscal deficits while supply shocks imply a negative relationship between both series. In order to check empirical relevance of this intuition, I use a standard Real Business Cycle model. With varying estimated volatility ratios of supply and demand shocks, the model succeeds in matching the switching magnitude of the correlation between the US balance of trade and fiscal deficits over each sub-sample except the 1990s.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 1999021.
Date of creation: 01 Jun 1999
Date of revision:
Find related papers by JEL classification:
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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