Working Paper: NBER ID: w1790
Authors: Martin Feldstein
Abstract: This paper, prepared for the annual meetings of the American Economic Association, discusses how the increases in the U.S. budget deficits since 1980 have affected the economies of Western Europe. The analysis emphasizes that U.S. deficits have not only affected these economies directly but have also induced them to adopt more restrictive monetary and fiscal policies than they would otherwise have chosen. This induced shift in domestic policies is the primary reason why European governments have pressed for a reduction in the U.S. budget deficits despite the favorable impact of those deficits on European trade surpluses.
Keywords: US budget deficits; European economies; monetary policy; fiscal policy
JEL Codes: E62; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US budget deficits (H68) | restrictive monetary and fiscal policies in Europe (E65) |
| US budget deficits (H68) | economic conditions in Europe (N93) |
| US budget deficits (H68) | stronger dollar (F31) |
| stronger dollar (F31) | European inflation (E31) |
| stronger dollar (F31) | European economic growth (O52) |
| European inflation (E31) | unemployment rates in Europe (J60) |
| stronger dollar (F31) | contraction in German monetary policy (E58) |
| contraction in German monetary policy (E58) | unemployment rates in Europe (J60) |
| US budget deficits (H68) | trade balances in Europe (N93) |