Trade Flows and Fiscal Multipliers
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.
For helpful comments, we thank Olivier Coibion, Giancarlo Corsetti, Michael Devereux, Fabio Ghironi, Eric Leeper, Campbell Leith, Evi Pappa, Paolo Pesenti, Morten Ravn, Linda Tesar, and participants at various conferences and seminars. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Matteo Cacciatore & Nora Traum, 2022. "Trade Flows and Fiscal Multipliers," The Review of Economics and Statistics, vol 104(6), pages 1206-1223. citation courtesy of