## Credit Cycles, Fiscal Policy, and Global Imbalances

_IMF Working Papers, February 19, 2021_

## Source details

**Canonical URL:** [Credit Cycles, Fiscal Policy, and Global Imbalances](https://www.imf.org/en/publications/wp/issues/2021/02/19/credit-cycles-fiscal-policy-and-global-imbalances-50084)

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## Bibliographic details
- Authors: Callum Jones, Pau Rabanal
- Published: February 19, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513570013.001

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### Summary
- The paper studies the role that changes in credit and fiscal positions play in explaining current account fluctuations.
- Empirical finding: the current account declines when credit increases, and when the fiscal balance declines.
- Method: a two-country model with financial frictions and fiscal policy is estimated using annual data for the U.S. and a “rest of the world” aggregate that includes main advanced economies.
- Key quantitative attributions: about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent.

### Empirical findings and key statistics
- Current account movements are negatively associated with increases in credit.
- Current account movements are negatively associated with declines in the fiscal balance.
- Quantified contributions to U.S. current account balance fluctuations:
  - Domestic credit shocks: about 30 percent.
  - Fiscal shocks: about 14 percent.

### Model, data, and estimation
- Framework: two-country general equilibrium model with financial frictions and explicit fiscal policy.
- Data: annual data for the U.S. and a “rest of the world” aggregate that includes main advanced economies.
- Objective: reconcile empirical correlations between credit, fiscal balances, and current account fluctuations within the calibrated/estimated model.

### Policy evaluation and recommendations
- Macroprudential policy rules:
  - Simple macroprudential rules that react to domestic credit conditions or to domestic house prices help reduce global imbalances.
  - By taming the financial cycle, such macroprudential rules would have led to a smaller and less volatile U.S. current account deficit.
- Fiscal policy:
  - A countercyclical fiscal policy rule that stabilizes output growth reduces both the level and volatility of the U.S. current account deficit.

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_Source: https://www.imf.org/en/publications/wp/issues/2021/02/19/credit-cycles-fiscal-policy-and-global-imbalances-50084_