Spillover Notes

Spillovers from US Government Spending Shocks : Impact on External Positions

Author/Editor:

Adina Popescu ; Ippei Shibata

Publication Date:

October 18, 2017

Electronic Access:

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Summary:

This note analyzes the impact of preannounced government spending shocks in the United States on the real effective exchange rate and the trade balance. Using a vector autoregression framework that allows anticipated fiscal shocks to be identified using survey information, we find that preannounced spending shocks lead to a sizable real effective dollar appreciation and a worsening of both the aggregate trade balance and bilateral trade balances in a panel of partner countries. The results are robust to controlling for country-specific variables like the macroeconomic and policy conditions in the recipient countries, are generalized across regions and might have decreased during the zero-interest-lower-bound regime.

Series:

Spillover Notes No.17/01

Subject:

Balance of trade External shocks External spillovers Flexible exchange rates Interest rate increases Real effective exchange rates Real exchange rates Spillovers Trade balances United States Western Hemisphere