Working Paper: NBER ID: w2339
Authors: Jeffrey Sachs; Nouriel Roubini
Abstract: This paper uses a global macroeconomic simulation model to identify the factors that have contributed to global trade and financial imbalances in the 1980s. After investigating the properties of monetary and fiscal policies in the model, we examine whether the budgetary shifts in the OECD economies in the 1980s can account for the bulk of trade and exchange rate movements. Our conclusions are mixed. The combination of sharply higher fiscal deficits in the United States and sharply reduced deficits in Japan goes far to explain the movements of the trade balances and exchange rates of the two economies. However, the drop in the dollar vis-a-vis the Yen since late 1985 is not well explained by the model. We also investigate the prospects for a reduction of the U.S. trade deficits if U.S. budget deficits are in fact reduced, as well as the possible role for Japanese monetary and fiscal policies in reducing the trade imbalances of the two countries.
Keywords: macroeconomic imbalances; fiscal policy; global trade; exchange rates
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. fiscal expansion (E62) | increased interest rates (E43) |
| increased interest rates (E43) | capital inflows from Japan (F21) |
| capital inflows from Japan (F21) | appreciation of the dollar (F31) |
| appreciation of the dollar (F31) | worsened U.S. trade imbalance (F69) |
| reduced U.S. budget deficits (H69) | potential reduction in U.S. trade deficits (F69) |
| sharply higher U.S. fiscal deficits + reduced deficits in Japan (H69) | trade balance movements and exchange rates (F32) |