Policy Mix and the US Trade Balance

By Carolina Osorio Buitron, Gustavo Adler

September 19, 2017

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Format: Chicago

Carolina Osorio Buitron, and Gustavo Adler. Policy Mix and the US Trade Balance, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The strong US policy response to the 2008-09 financial crisis raised concerns about its impact (spillovers) on other countries, with great focus on the monetary stimulus but little attention to fiscal policy, despite their combined deployment. Using a sign-restricted structural VAR approach, we study the trade spillovers of the post-crisis policy mix, by assessing the joint impact of monetary and fiscal policy. We find that aggregate trade effects, as reflected in the trade balance, varied across time, reflecting the different timing of fiscal and monetary stimuli, with overall positive spillovers in the immediate aftermath of the crisis. At the same time, reflecting the different transmission mechanisms of monetary policy, we find that the effects differed greatly between trading partners with fixed and flexible exchange rates. In general, our results highlight (i) the importance of studying fiscal and monetary policy spillovers jointly in order to avoid attenuation bias from omitted variables; and (ii) that trading partners’ exchange rate regimes are of first order importance in determining the impact of policy spillovers.

Subject: Exchange rate arrangements, Financial crises, Fiscal policy, Foreign exchange, International trade, Trade balance, Trade policy

Keywords: Exchange rate arrangements, Fiscal policy, Fiscal policy measure, Fiscal policy shock, Global, Monetary policy, Monetary policy shock, Monetary policy stimulus, Shocks to the trade balance, Spillovers, Trade balance, Trade policy, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/204
Stock No:

WPIEA2017204
ISBN:

9781484319314
ISSN:

1018-5941

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