The Effects of Fiscal Policy on International Imbalances: Japan and the United States
Evidence from three multicountry models is used to assess the current account effects of U.S. and Japanese fiscal policies. Asymmetries in the effects of U.S. and Japanese policies are analyzed in some detail, and attributed to differences in country size, in trade patterns (which have only a small effect) and in the extent to which induced changes in real exchange rates switch demand from domestic to foreign output. Fiscal policy has substantial current account effects in the models. For example, switching $50 billion of sustained government spending from the United States to Japan would, in the third year, improve the U.S. current account by $24 billion and worsen that of Japan by $20 billion. Induced changes in nominal exchange rates are found to play a relatively small role in determining the effects of fiscal policy on the nominal current account.
M.O.L. Bacharach, M.A.H. Dempster and J.L. Enos, editors. Mathematical Models in Economics: Oxford Mathematical Economics Seminar Twenty-fifth Anniversary Volume. Oxford: Oxford University Press, forthcoming.