Policy Mix and the US Trade Balance

26 Pages Posted: 16 Oct 2017

See all articles by Gustavo Adler

Gustavo Adler

International Monetary Fund (IMF) - Research Department

Carolina Osorio-Buitron

International Monetary Fund (IMF)

Date Written: September 2017

Abstract

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 offirst order importance in determining the impact of policy spillovers.

Keywords: Spillovers, United States, Western Hemisphere, Fiscal policy, monetary policy, trade balance, Monetary Policy (Targets, Instruments, and Effects), United monetary policy

JEL Classification: E52

Suggested Citation

Adler, Gustavo and Osorio-Buitron, Carolina, Policy Mix and the US Trade Balance (September 2017). IMF Working Paper No. 17/204, Available at SSRN: https://ssrn.com/abstract=3053200

Gustavo Adler (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Carolina Osorio-Buitron

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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