Working Paper: NBER ID: w27652
Authors: Matteo Cacciatore; Nora Traum
Abstract: We present novel insights on the role of international trade following unanticipated government spending and income tax changes in a flexible exchange rate environment. In a simple two-country, two-good model, we show analytically that fiscal multipliers can be larger in economies more open to trade, even when fiscal expansions imply a trade deficit. Cross-country comovement can be positive or negative. Three factors determine how trade linkages affect fiscal multipliers: the relative import share of public and private goods, how the government finances its budget, and the currency invoicing of exports. A Bayesian prior-predictive analysis shows a quantitative international business-cycle model bears the same predictions. Estimating the model on Canadian and U.S. data, we find support for larger multipliers relative to a counterfactually closed economy and positive cross-country spillovers.
Keywords: No keywords provided
JEL Codes: E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fiscal multipliers (E62) | trade openness (F43) |
| trade openness (F43) | fiscal multipliers (E62) |
| unanticipated government spending (H59) | fiscal multipliers (E62) |
| income tax changes (H26) | fiscal multipliers (E62) |
| relative import share of public and private goods (H49) | fiscal multipliers (E62) |
| government financing method (H81) | fiscal multipliers (E62) |
| currency invoicing of exports (F10) | fiscal multipliers (E62) |
| crowding-in of private consumption and investment (E20) | fiscal multipliers (E62) |
| distortionary financing (H31) | fiscal multipliers (E62) |