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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.
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