Working Paper: CEPR ID: DP6110
Authors: Rudolfs Bems; Luca Dedola; Frank Smets
Abstract: This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed?s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s.
Keywords: global imbalances; open economy; VARs
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive technology shocks (O49) | Deterioration of the trade balance (F14) |
| Expansionary fiscal policies (E62) | Deterioration of the trade balance (F14) |
| Expansionary monetary policies (E52) | Deterioration of the trade balance (F14) |
| One-standard deviation positive government spending shock (E62) | Significant negative impact on net trade-to-GDP ratio (F69) |
| Positive technology developments (O39) | Deterioration of the trade balance (F14) |
| Normalization of policies (F68) | Potential improvement of around 2 percentage points in trade balance (F14) |