Title: Trade flows, trade policy, and the size of fiscal multipliers
Authors: Matteo Cacciatore - HEC Montreal (Canada)
Nora Traum - HEC Montreal (Canada) [presenting]
Abstract: The aim is to study how trade linkages affect the domestic and international transmission of fiscal shocks. We develop a two-country model with heterogeneous firms, endogenous producer entry in domestic and export markets, and a richly specified fiscal sector. We estimate the model with Bayesian methods and U.S. and Euro Area data. The model offers a fresh vantage on the international transmission of fiscal shocks. Fluctuations in the number of traded varieties embedded in trade flows quantitatively affect the size of government spending multipliers and spillover effects abroad. We show the strength of this channel depends crucially on expectations of how government debt is financed. We use the estimated model to provide a quantitative assessment of the effectiveness of a joint fiscal and trade policy intervention on output, trade, and government debt.