Spillovers from US Government Spending Shocks: Impact on External Positions
Spillover Notes, October 18, 2017
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- Spillovers from US Government Spending Shocks: Impact on External Positions
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Bibliographic details
- Authors: Adina Popescu, Ippei Shibata
- Published: October 18, 2017
- Series: Spillover Notes
- DOI: https://doi.org/10.5089/9781484320259.062
Summary and methodology
- Objective: Analyze the impact of preannounced government spending shocks in the United States on the real effective exchange rate and the trade balance.
- Method: Vector autoregression framework that allows anticipated fiscal shocks to be identified using survey information.
Key findings
- Preannounced US government spending shocks lead to a sizable real effective dollar appreciation.
- Such shocks cause a worsening of the aggregate trade balance.
- Bilateral trade balances in a panel of partner countries also worsen following preannounced US spending shocks.
- Results are robust to controlling for country-specific variables, including macroeconomic and policy conditions in recipient countries.
- Effects are generalized across regions.
- The spillovers might have decreased during the zero-interest-lower-bound regime.
Policy-relevant implications
- Anticipated US fiscal expansions can have meaningful external effects through exchange rate appreciation and trade deterioration for partner countries.
- Recipient-country macroeconomic and policy conditions matter for the transmission but do not eliminate the adverse trade-balance effects.
- Consideration of monetary policy regimes (for example, the zero-interest-lower-bound) is important when assessing the magnitude of spillovers.
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