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Narrowing the US twin deficits: simulations with a world macroeconometric model

Author

Listed:
  • Alberto Bagnai

    (Department of Public Economics, University of Rome I)

  • Silvia Galli

    (Department of Public Economics, University of Rome I)

  • Eleonora Pierucci

    (Department of Economic Sciences, University of Rome I)

  • Simone Raimondi

    (Department of Public Economics, University of Rome I)

Abstract

In this paper we extend the macroeconometric model developed in Bagnai (2004) by linking it to a submodel for the Japanese economy, and we utilize this extended model to investigate several hypotheses of reduction in the US twin deficits. The Japanese submodel is specified and estimated along the lines set out in Bagnai and Carlucci (2003), using the “cointegration with endogenous structural break” estimation method of Gregory and Hansen (1996). The estimation results show that the Japanese economy underwent a major structural change after the first oil-price shock. The “twin deficits” simulations consider two policy instruments: a US dollar exchange rate devaluation, and a fiscal consolidation, carried out through a decrease in US government consumption. We analyze both different sizes and different timing of these policy measures, as well as their interactions, in order to evaluate their effectiveness, and the costs they impose on the partner countries (in particular, on the Euro area and Japan).

Suggested Citation

  • Alberto Bagnai & Silvia Galli & Eleonora Pierucci & Simone Raimondi, 2004. "Narrowing the US twin deficits: simulations with a world macroeconometric model," International Trade 0411004, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpit:0411004
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    References listed on IDEAS

    as
    1. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
    2. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    4. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    5. Alberto Bagnai & Francesco Carlucci, 2002. "Dynamic paths of the European economy: simulations using an EU aggregate model," Econometrics 0206001, University Library of Munich, Germany.
    6. Bagnai, Alberto & Carlucci, Francesco, 2003. "An aggregate model for the European Union," Economic Modelling, Elsevier, vol. 20(3), pages 623-649, May.
    7. Blangiewicz, Maria & Charemza, Wojciech W, 1990. "Cointegration in Small Samples: Empirical Percentiles, Drifting Moments and Customized Testing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(3), pages 303-315, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    twin deficits; structural break; econometric model; Japan; EMU; USA;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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