## ch2

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---

### Introduction and Overview
- Examines how the unprecedented fiscal policy expansion in response to the COVID-19 crisis and the expected fiscal consolidation over the coming years will affect economies’ trade balances and exchange rates.
- Textbook models (Mundell-Fleming and calibrated open-economy general equilibrium models with non-Ricardian features) predict that fiscal consolidation (tax hikes or spending cuts) reduces demand, leads to exchange rate depreciation, and raises the trade balance.
- Historical evidence is mixed and identification is challenging because fiscal policy often responds to shocks that also affect external balances.

### Questions Addressed
- Do changes in fiscal policy affect an economy’s external current account balance, and how persistent is the effect? Through what channels do adjustments occur? What happens to exchange rates, exports, and imports?
- Does the impact depend on composition of policy changes (taxes versus spending), synchronization across economies, and structural characteristics?
- Will fiscal policy changes during 2020–26 affect the global constellation of current account deficits and surpluses?
- Would alternative fiscal policy paths (different consolidation paths or additional expansions) affect global current account balances?

### Methods and Data
- Historical analysis covers 33 advanced and emerging market and developing economies over the past 40 years (sample listed in source).
- Uses a Romer and Romer (2010) narrative approach to identify tax and government spending changes motivated by long-term sustainability rather than near-term cyclical conditions.
- Merges multi-country narrative databases, adds additional economies and fiscal policy changes up to 2019; source documents include IMF Staff Reports; IMF Recent Economic Developments reports; Stability and Convergence Programmes; OECD Economic Surveys; and, for the United States, Congressional Budget Office reports.
- Dataset includes 342 fiscal policy changes averaging 1.04 percent of GDP a year, with a standard deviation of 0.98 percentage point of GDP and a range from –0.9 percent of GDP (Uruguay, 2005) to 5.23 percent of GDP (Portugal, 2013).
- Empirical implementation: local projections (Jordà 2005) estimating cumulative effects of narrative fiscal shocks using specification Δy_{i,t:t+h} = α^h_i + α^h_t + β^h ΔF_{i,t:t+h} + γ^h X_{i,t} + e^h_{i,t}, with two lags of the external sector variable and the narrative fiscal shock in X_{i,t}, time fixed effects, economy fixed effects, and inference based on Driscoll-Kraay standard errors.
- Robustness checks conducted (see Online Annex 2.1) and additional simulations using the IMF’s multi-country general equilibrium G20 Model to address synchronized recent fiscal changes.

### Baseline Results — Magnitudes and Persistence
- A 1 percent of GDP fiscal consolidation:
  - Raises the current account by 0.63 percent of GDP within two years (90 percent confidence interval: 0.43 to 0.82 percent of GDP).
  - Produces a real effective exchange rate depreciation of 1.80 percent within a year (90 percent confidence interval: 1.15 to 2.45 percent).
- The effects persist over five years.
- Estimates capture the overall current account effect including the impact via changes in economic activity and are stronger than studies that hold the response of economic activity constant.

### Adjustment Channels and Time Variation
- Main channel: import compression driven by declines in output following fiscal consolidation.
- Following consolidation:
  - Real GDP falls substantially and persistently.
  - Real investment falls substantially and persistently.
  - Real imports decline, contributing most of the current account improvement.
  - Real exports show, on average, a small response not statistically distinguishable from zero.
- Post-global financial crisis (2010–19) effects strengthened:
  - Current account balance rises by 0.82 percent of GDP within two years.
  - Real GDP falls by 1.64 percent within three years (compared with 0.51 percent before the global financial crisis).
  - Larger declines in investment and imports accompany the stronger aggregate demand reduction.
  - Real effective exchange rate depreciation remains substantial and comparable to earlier decades.
- Heterogeneity: point estimates larger for emerging market and developing economies than for advanced economies (differences not statistically distinguishable). Effects broadly comparable across tax- and spending-based adjustments except for capital income taxation and public investment, which have larger effects.

### Effects of 2020–21 Fiscal Expansions and 2020–26 Prospects
- 2020–21 fiscal expansions had:
  - Sizable direct effects on individual economies’ current account balances.
  - More limited overall effects at the global level due to high synchronization across economies.
- Cross-country relative stance matters:
  - Economies implementing relatively limited tax reductions and spending increases versus trading partners experienced a rise in their current account balances and currency depreciation.
- Global balances:
  - High synchronization of fiscal expansions in 2020 implies a modest net impact on global balances (the sum of absolute current account deficits and surpluses).
  - In 2021–22, fiscal expansion is more concentrated among current account deficit economies while surplus economies withdraw fiscal support to a greater extent, resulting in wider global balances.
- Medium-term projection:
  - Current account deficit economies expected to implement more fiscal consolidation over the medium term, producing a gradual reduction in global balances to below pre–COVID-19 levels.
  - Risks that could forestall reduction include additional fiscal expansions by current account deficit economies or a faster-than-expected pace of fiscal consolidation among current account surplus economies.
  - A synchronized global investment push in support of the recovery would have minimal implications for global balances.

### Model Description and Context (G20 Model)
- Uses IMF’s G20 Model: an annual, general equilibrium model of the global economy that includes all G20 countries plus five regional blocks for the rest of the world.
- Ricardian equivalence is broken via assumptions of finite lifetimes, liquidity-constrained consumers, and distortionary fiscal instruments.
- Each country/block calibrated for size, macro steady-state ratios, and behavioral parameters.
- Model suited to analyze globally synchronized policy actions relevant to COVID-19 shock.

### Role of Composition (Fiscal Instrument)
- Simulated instruments: consumption taxes, capital income taxes, labor taxes, government consumption, general transfers, targeted transfers, and government investment.
- Canada block example:
  - A 1 percent of GDP fiscal consolidation raises the current account balance by 0.4 percent of GDP within three years and 0.5 to 0.6 percent within five years for all instruments except capital income taxation and government investment.
  - When consolidation falls entirely on capital income taxation or government investment, impact on current-account-to-GDP ratio is larger, reaching above 1 percent of GDP for capital income taxation.
- Most of the 2020–21 fiscal expansion focused on transfers, support for firms and households, and government consumption (health spending), not primarily on capital income taxation or cuts in government investment.

### Role of Synchronization (Global vs. Domestic Action)
- In globally synchronized consolidation (all economies consolidate by 1 percent of GDP), Canada’s current account declines modestly—i.e., the current account does not increase following a global fiscal consolidation.
- Rationale: sum of all current accounts in the world must be zero; what matters is fiscal policy change relative to other countries and country characteristics.
- Global consolidation leads to a fall in the world real interest rate, partially absorbing adjustment by reducing the need for private saving and investment changes.

### Role of Economic Characteristics
- Fiscal consolidation has larger effects on the current account balance in economies that are:
  - More open to trade (greater trade openness increases the relative impact on imports).
  - Have a greater share of liquidity-constrained households.
  - Have fixed or less flexible exchange rate regimes.
- Illustrative comparisons: United States (lower trade openness) vs. Korea (higher); Canada (lower share of liquidity-constrained households) vs. emerging market oil exporters (higher); Germany (currency union, lower exchange rate flexibility) vs. non-euro-area EU economies (higher flexibility).

### Special COVID-19 Factors Affecting Transmission
- Lockdowns, reduced mobility, and pandemic-related uncertainty likely limited households’ ability and willingness to spend fiscal support, increasing precautionary savings.
- These factors likely reduced the impact of fiscal expansions on aggregate demand and imports in 2020–21; impacts may be smaller than in normal times.
- As the pandemic is brought under control and lockdowns ease, these dampening influences should fade.

### Implications of Fiscal Policies During 2020–26 for External Balances
- Fiscal changes measured as cumulative change in the cyclically adjusted fiscal balance compared with 2019; expected path based on July 2021 WEO Update forecasts.
- Current account deficit economies had, on average, larger fiscal expansions in 2020 and 2021: the GDP-weighted average change in the cyclically adjusted fiscal balance is close to 5 percent in 2020 and 2021 for current account deficit economies.
- In the medium term, current account deficit economies are expected to undertake relatively greater withdrawal of temporary fiscal support under current forecasts.

### Individual and Global Impacts (G20 Model Simulations)
- Direct effect of fiscal expansions during 2020–21 on current account balances: reduce them by an average of about 1.5 percent of GDP.
- Trade openness matters: e.g., in 2020–21 Germany’s negative impact on the current account is larger than Italy’s despite similar fiscal changes, reflecting Germany’s greater trade openness.
- Example: Mexico’s current account impact in 2020–21 is about 1.5 percent of GDP under global fiscal action versus –0.4 percent of GDP under individual action, reflecting Mexico’s openness and larger fiscal support in the rest of the world.
- Fiscal policy contributes to a widening of global current account balances for most of the projection period under the baseline, largely driven by the US fiscal expansion; the widening effect dissipates by 2026 and is particularly marked in 2021.
- In the absence of the fiscal response to COVID-19, global balances would have been on a steep narrowing path beginning in 2021, rather than widening as in the baseline.

### Alternative Fiscal Policy Paths and Global Current Account Balances
- Scenario: additional gradual 3 percent of GDP fiscal consolidation starting in 2022 by current account surplus economies:
  - Additional consolidation by surplus economies would substantially widen global balances over the medium term.
  - Additional consolidation by current account deficit economies would contribute to further narrowing in global balances.
- Alternative expansion: if current account deficit economies expand fiscal policy by an additional 3 percent of GDP, global current account balances widen substantially compared with the baseline.
- If current account surplus economies provide more fiscal support compared with the baseline, global current account balances would be substantially reduced.
- Mechanism: additional consolidation has larger impact for surplus economies because they are, on average, more open; the same fiscal consolidation reduces imports more in surplus economies, increasing surpluses more than it reduces deficits in deficit economies.

### Synchronized Public Investment Push (Simulation Assumptions and Results)
- For G20 economies with fiscal space:
  - Public infrastructure investment increases by ½ percent of GDP in 2021.
  - Public infrastructure investment rises to 1 percent of GDP in 2022, and stays at that elevated level until 2025.
- For G20 economies at risk with respect to fiscal space, public infrastructure spending increases by one-third of the amount in countries with ample or some fiscal space.
- No increase in public infrastructure spending in countries with no fiscal space.
- Result:
  - A synchronized investment increase across G20 economies has only marginal effects on global current account balances (scenario deviation from baseline is very small).
  - A synchronized global investment push or a synchronized health spending push to end the pandemic and support the recovery could have large effects on GDP with limited effects on global balances.
  - IMF (2020a) estimate: level of global real GDP would increase by almost 2 percent by 2025 under a global synchronized investment push.

### Results for 2026 and Medium-Term Outlook
- Under the WEO baseline, fiscal policy contributes to a widening of global current account balances for most of the projection period, largely driven by the US fiscal expansion, but this widening effect dissipates by 2026.
- Medium-term outlook under currently expected policies:
  - Current account deficit economies implement more fiscal consolidation than current account surplus economies, contributing to a gradual reduction in global balances to below pre–COVID-19 levels.
- Risks and alternate outcomes:
  - Additional deficit-financed fiscal expansions by current account deficit economies beyond expectations, or faster-than-expected fiscal consolidation among current account surplus economies, could forestall the reduction and even widen current account balances.
  - Widening balances could fuel trade tensions, protectionist measures, and increase the likelihood of disruptive currency and asset price adjustments.
- Spillovers and relative fiscal stances:
  - An individual economy’s current account and real exchange rate depend critically on its fiscal policy stance relative to trading partners.
  - Economies that implemented less fiscal support than trading partners may see rising current account balances and currency depreciation.
  - Economies withdrawing fiscal support more rapidly than trading partners may face adverse consequences; economies expanding more than trading partners may face widening trade deficits and currency appreciation.
- Policy implications beyond fiscal policy:
  - Narrowing excessive surpluses and deficits will require measures beyond fiscal policy, including policies and structural reforms that promote near-term recovery and medium-term external rebalancing supportive of growth.
  - Specific measures referenced include medium-term fiscal consolidation in economies with excessive current account deficit balances and policies to promote investment and diminish excess saving in economies with excessive current account surpluses.
  - Synchronized fiscal measures across many economies (for example, a global push to upgrade public infrastructure and end the pandemic) are likely to have limited implications for individual economies’ current account balances.

### Robustness and Caveats
- Results robust to a number of checks (Online Annex 2.1).
- Narrative approach reduces endogeneity by focusing on measures motivated by long-term sustainability rather than near-term cyclical considerations.
- Potential predictability of consolidation measures addressed via robustness estimators (augmented inverse propensity score weighting), which yield similar or stronger effects.

*Source: ch2 - 2. Results for 2026, 2021 EXTERNAL SECTOR REPORT, International Monetary Fund | 2021*

### Introduction

### ch2 - Introduction

### Overview
- The chapter examines how the unprecedented fiscal policy expansion in response to the COVID-19 crisis and the expected fiscal consolidation over the coming years will affect economies’ trade balances and exchange rates.
- Textbook models (Mundell-Fleming and calibrated open-economy general equilibrium models with non-Ricardian features) predict that fiscal consolidation (tax hikes or spending cuts) reduces demand, leads to exchange rate depreciation, and raises the trade balance.
- There is limited consensus and mixed historical evidence on the size and persistence of fiscal policy effects on current account balances and exchange rates; identification is challenging because fiscal policy often responds to shocks that also affect external balances.

### Questions Addressed
- Do changes in fiscal policy affect an economy’s external current account balance, and how persistent is the effect? Through what channels do adjustments occur? What happens to exchange rates, exports, and imports?
- Does the impact depend on composition of policy changes (taxes versus spending), synchronization across economies, and structural characteristics?
- Will fiscal policy changes during 2020–26 affect the global constellation of current account deficits and surpluses?
- Would alternative fiscal policy paths (different consolidation paths or additional expansions) affect global current account balances?

### Methods and Data
- Historical analysis covers 33 advanced and emerging market and developing economies over the past 40 years (sample includes Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, Costa Rica, Denmark, the Dominican Republic, Ecuador, Finland, France, Germany, Guatemala, India, Ireland, Italy, Jamaica, Japan, Mexico, The Netherlands, Paraguay, Peru, Portugal, Spain, Sweden, the United Kingdom, the United States, and Uruguay).
- Uses a Romer and Romer (2010) narrative approach to identify tax and government spending changes that historical documents indicate were motivated by reducing budget deficits and ensuring long-term sustainability rather than by responses to near-term macroeconomic conditions.
- Merges existing multi-country narrative databases, adds additional economies and fiscal policy changes up to 2019; source documents include IMF Staff Reports; IMF Recent Economic Developments reports; Stability and Convergence Programmes; OECD Economic Surveys; and, for the United States, Congressional Budget Office reports.
- The dataset includes 342 fiscal policy changes averaging 1.04 percent of GDP a year, with a standard deviation of 0.98 percentage point of GDP and a range from –0.9 percent of GDP (Uruguay, 2005) to 5.23 percent of GDP (Portugal, 2013).
- Empirical implementation: local projections (Jordà 2005) estimating cumulative effects of narrative fiscal shocks using specification Δy_{i,t:t+h} = α^h_i + α^h_t + β^h ΔF_{i,t:t+h} + γ^h X_{i,t} + e^h_{i,t}, with two lags of the external sector variable and the narrative fiscal shock in X_{i,t}, time fixed effects, economy fixed effects, and inference based on Driscoll-Kraay standard errors.
- Robustness checks conducted (see Online Annex 2.1) and additional simulations using the IMF’s multi-country general equilibrium G20 Model to address the highly synchronized nature of recent fiscal changes.

### Baseline Results — Magnitudes and Persistence
- A 1 percent of GDP fiscal consolidation:
  - Raises the current account by 0.63 percent of GDP within two years (90 percent confidence interval: 0.43 to 0.82 percent of GDP).
  - Produces a real effective exchange rate depreciation of 1.80 percent within a year (90 percent confidence interval: 1.15 to 2.45 percent).
- The effects persist over five years.
- These estimated effects are stronger than typically found in studies that hold the response of economic activity constant; the chapter’s estimates capture the overall current account effect including the impact via changes in economic activity.

### Adjustment Channels and Time Variation
- Main channel: import compression driven by declines in output following fiscal consolidation.
- Following consolidation:
  - Real GDP falls substantially and persistently.
  - Real investment falls substantially and persistently.
  - Real imports decline, contributing most of the current account improvement.
  - Real exports show, on average, a small response that is not statistically distinguishable from zero.
- For the period 2010–19 (post-global financial crisis), effects strengthened:
  - Current account balance rises by 0.82 percent of GDP within two years.
  - Real GDP falls by 1.64 percent within three years (compared with 0.51 percent before the global financial crisis).
  - Larger declines in investment and imports accompany the stronger aggregate demand reduction.
  - The real effective exchange rate depreciation remains substantial and comparable to earlier decades.
- Heterogeneity: point estimates are larger for emerging market and developing economies than for advanced economies, though differences are not statistically distinguishable. Effects are broadly comparable across tax- and spending-based adjustments, except changes in capital income taxation and public investment, which have larger effects.

### Effects of 2020–21 Fiscal Expansions and 2020–26 Prospects
- 2020–21 fiscal expansions had:
  - Sizable direct effects on individual economies’ current account balances.
  - More limited overall effects at the global level due to a high degree of synchronization across economies (many economies expanded fiscal support simultaneously).
- Cross-country relative stance matters:
  - Economies that implemented relatively limited tax reductions and spending increases versus trading partners experienced a rise in their current account balances and currency depreciation.
- Global balances:
  - High synchronization of fiscal expansions in 2020 implies a modest net impact on global balances (the sum of absolute current account deficits and surpluses).
  - In 2021–22, fiscal expansion is more concentrated among current account deficit economies while surplus economies withdraw fiscal support to a greater extent, resulting in wider global balances.
- Medium-term projection:
  - Current account deficit economies are expected to implement more fiscal consolidation over the medium term, producing a gradual reduction in global balances to below pre–COVID-19 levels.
  - Risks that could forestall this reduction include additional fiscal expansions by current account deficit economies or a faster-than-expected pace of fiscal consolidation among current account surplus economies.
  - A synchronized global investment push in support of the recovery would have minimal implications for global balances.

### Robustness and Caveats
- Results robust to a number of checks (Online Annex 2.1).
- Narrative approach reduces endogeneity by focusing on fiscal measures motivated by long-term sustainability rather than near-term cyclical considerations, but potential predictability of consolidation measures based on past developments is addressed via robustness estimators (augmented inverse propensity score weighting), which yield similar or stronger effects.

*ch2 - Introduction*

### 3. Export Volume4. Import Volume

### 3. Export Volume4. Import Volume

### Model description and context
- Analysis uses the IMF’s G20 Model: an annual, general equilibrium model of the global economy that includes all Group of Twenty (G20) countries plus five regional blocks to model the rest of the world.  
- Ricardian equivalence is broken via assumptions of finite lifetimes, liquidity-constrained consumers, and distortionary fiscal instruments.  
- Each country/block is calibrated to reflect differences in size, macroeconomic steady-state ratios, and behavioral parameters.  
- The model allows analysis of globally synchronized policy actions relevant to the COVID-19 shock when many countries expanded fiscal policy simultaneously.  
- Post-global financial crisis period referenced as 2010–19.

### Role of composition (fiscal instrument)
- Simulated instruments in the G20 Model: consumption taxes, capital income taxes, labor taxes, government consumption, general transfers, targeted transfers, and government investment.  
- Key simulation result (Canada block example): a 1 percent of GDP fiscal consolidation raises the current account balance by 0.4 percent of GDP within three years and 0.5 to 0.6 percent within five years for all fiscal instruments except capital income taxation and government investment.  
- When the entire consolidation falls on capital income taxation or government investment, the impact on the current-account-to-GDP ratio is larger, reaching above 1 percent of GDP for capital income taxation.  
- Most of the 2020–21 fiscal expansion was not driven primarily by capital income taxation or cuts in government investment; it focused on transfers, support for firms and households, and government consumption (health spending).

### Role of synchronization (global vs. domestic action)
- In globally synchronized consolidation (all economies consolidate by 1 percent of GDP), Canada’s current account declines modestly—i.e., the current account does not increase following a global fiscal consolidation.  
- Rationale: the sum of all current accounts in the world must be zero; therefore, all economies cannot increase their current accounts simultaneously. What matters is fiscal policy change relative to other countries and country characteristics.  
- Global consolidation also leads to a fall in the world real interest rate, which partially absorbs adjustment by reducing the need for private saving and investment changes.

### Role of economic characteristics
- Fiscal consolidation has larger effects on the current account balance in economies that are:
  - More open to trade (greater trade openness increases the relative impact on imports versus domestically produced goods).  
  - Have a greater share of liquidity-constrained households (such households cannot borrow and respond more strongly to fiscal shocks).  
  - Have fixed or less flexible exchange rate regimes (lack of country-specific monetary policy response amplifies the effect).  
- Illustrative model comparisons:
  - Trade openness: United States (lower) vs. Korea (higher).  
  - Liquidity constraints: Canada (lower share) vs. emerging market oil exporters (higher share).  
  - Exchange rate flexibility: Germany (currency union, lower flexibility) vs. non-euro-area EU economies (higher flexibility).

### Special COVID-19 factors affecting transmission
- Government-imposed lockdowns, voluntary reduced mobility, and pandemic-related uncertainty may have limited households’ ability and willingness to spend received fiscal support, increasing precautionary savings.  
- These factors likely reduced the impact of fiscal expansions on aggregate demand and imports in 2020–21, so the impact of fiscal policy changes in 2020–21 may be smaller than in normal times.  
- As the pandemic is brought under control and lockdowns ease, these dampening influences should fade.

### Implications of fiscal policies during 2020–26 for external balances
- Fiscal policy changes implemented and expected (baseline path) are measured as the cumulative change in the cyclically adjusted fiscal balance compared with 2019; the expected path is based on the July 2021 WEO Update forecasts.  
- Current account deficit economies had, on average, larger fiscal expansions in 2020 and 2021: the GDP-weighted average change in the cyclically adjusted fiscal balance is close to 5 percent in 2020 and 2021 for current account deficit economies.  
- In the medium term, current account deficit economies are expected to undertake relatively greater withdrawal of temporary fiscal support under current forecasts.

### Individual impact (G20 Model simulations)
- Direct effect of fiscal expansions during 2020–21 on current account balances: reduce them by an average of about 1.5 percent of GDP.  
- Trade openness matters for magnitude: e.g., in 2020–21 Germany’s negative impact on the current account is larger than Italy’s despite similar fiscal changes, reflecting Germany’s greater trade openness.

### Global impact (relative fiscal changes matter)
- Global action simulations capture both domestic and rest-of-world fiscal changes.  
- Example: Mexico’s current account impact in 2020–21 is about 1.5 percent of GDP under global fiscal action versus –0.4 percent of GDP under individual action, reflecting Mexico’s relative openness and the larger fiscal support in the rest of the world.  
- Fiscal policy contributes to a widening of global current account balances for most of the projection period under the baseline, largely driven by the US fiscal expansion; the widening effect dissipates by 2026 and is particularly marked in 2021.  
- In the absence of the fiscal response to COVID-19, global balances would have been on a steep narrowing path beginning in 2021, rather than widening as in the baseline.

### Alternative fiscal policy paths and global current account balances
- Scenario comparison: baseline vs. an alternative in which current account surplus economies implement an additional gradual 3 percent of GDP fiscal consolidation starting in 2022 (scenario described; results shown in figure comparisons).  

_Source: IMF staff estimates._

### 2. Results for 2026

### 2. Results for 2026

### Current account impact (percentage points of GDP)
- Fiscal policy effects on current accounts depend on the relative size of the fiscal policy change and economies’ structural features during 2020–21 and over the medium term.
- Under the WEO baseline, fiscal policy contributes to a widening of global current account balances for most of the projection period, largely driven by the US fiscal expansion, but this widening effect dissipates by 2026.
- The analysis uses IMF G20 Model simulations; fiscal policy changes in 2020–26 are based on July 2021 WEO Update forecasts.
- Figures referenced: Figure 2.8 (Global Impact of Fiscal Policy Changes on the Current Account, 2020–26) and Figure 2.9 (Impact of Fiscal Policy on Global Absolute Current Account Balances, 2020–26).

### Scenarios: Additional fiscal consolidation and expansion
- Additional consolidation scenario:
  - Additional fiscal consolidation by economies with current account surpluses would substantially widen global balances over the medium term.
  - Additional fiscal consolidation by current account deficit economies would contribute to a further narrowing in global balances.
  - Simulations report the absolute sum of global current account deficits and surpluses under scenarios including an additional 3 percent of GDP in fiscal consolidation starting in 2022.
  - Figure referenced: Figure 2.10 (Scenario with Additional Fiscal Consolidation: Impact on Global Absolute Current Account Balances, 2020–26).

- Additional expansion scenario:
  - If current account deficit economies expand fiscal policy by an additional 3 percent of GDP, global current account balances widen substantially compared with the baseline.
  - If current account surplus economies provide more fiscal support compared with the baseline, global current account balances would be substantially reduced.
  - The simulation is based on an illustrative 3 percent of GDP gradual additional fiscal support starting in 2022.
  - Figure referenced: Figure 2.11 (Scenario with Additional Fiscal Expansion: Impact on Global Absolute Current Account Balances, 2020–26).

- Mechanism highlighted:
  - The impact of additional consolidation is larger for current account surplus economies than for deficit economies because surplus economies are currently, on average, more open than deficit economies. The same fiscal consolidation reduces imports more in surplus economies, increasing surpluses more than it reduces deficits in deficit economies.

### Synchronized Public Investment Push
- Simulation assumptions for G20 economies with fiscal space:
  - Public infrastructure investment increases by ½ percent of GDP in 2021.
  - Public infrastructure investment rises to 1 percent of GDP in 2022, and stays at that elevated level until 2025.
- For G20 economies deemed at risk with respect to fiscal space, public infrastructure spending increases by one-third of the amount in countries with ample or some fiscal space.
- There is no increase in public infrastructure spending in countries with no fiscal space.
- Result:
  - A synchronized investment increase across G20 economies has only marginal effects on global current account balances (the deviation of the scenario line from the baseline is very small).
  - A synchronized global investment push, or a synchronized health spending push to end the pandemic and support the recovery, could have large effects on GDP with limited effects on global balances.
  - According to IMF (2020a), the level of global real GDP would increase by almost 2 percent by 2025 under a global synchronized investment push.
  - Figure referenced: Figure 2.12 (Scenario with Synchronized Public Investment Push: Impact on Global Absolute Current Account Balances, 2020–26).

### Implications for the external outlook
- Medium-term outlook under currently expected policies:
  - Current account deficit economies implement more fiscal consolidation than current account surplus economies, contributing to a gradual reduction in global balances to below pre–COVID-19 levels.
- Risks and alternate outcomes:
  - Additional deficit-financed fiscal expansions by current account deficit economies beyond expectations, or faster-than-expected fiscal consolidation among current account surplus economies, could forestall the reduction and even widen current account balances.
  - Widening balances could fuel trade tensions, protectionist measures, and increase the likelihood of disruptive currency and asset price adjustments.
- Spillovers and relative fiscal stances:
  - What happens to an individual economy’s current account and real exchange rate depends critically on its fiscal policy stance relative to trading partners.
  - Economies that implemented less fiscal support than trading partners during the COVID-19 crisis may see rising current account balances and currency depreciation even if domestic support matched domestic needs.
  - Example noted: Mexico’s external current account increased sharply in 2020, reflecting larger fiscal expansions in major trading partners relative to Mexico’s relatively muted fiscal response, among other factors.
  - Economies withdrawing fiscal support more rapidly than trading partners may face similar adverse consequences; economies expanding more than trading partners may face widening trade deficits and currency appreciation.
- Policy implications beyond fiscal policy:
  - Narrowing excessive surpluses and deficits will require a broader set of measures beyond fiscal policy, including policies and structural reforms that promote near-term recovery and medium-term external rebalancing in a manner supportive of growth.
  - Specific measures referenced (discussed in Chapter 3) include medium-term fiscal consolidation in economies with excessive current account deficit balances, such as the United States, and policies to promote investment and diminish excess saving in economies with excessive current account surpluses, such as Germany.
  - Synchronized fiscal measures across many economies (for example, a global push to upgrade public infrastructure and end the pandemic) are likely to have limited implications for individual economies’ current account balances.

*Source: ch2 - 2. Results for 2026, 2021 EXTERNAL SECTOR REPORT, International Monetary Fund | 2021*

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_Source: https://www.imf.org/-/media/files/publications/esr/2021/english/ch2.pdf_