Title: Trade flows and fiscal multipliers
Authors: Nora Traum - HEC Montreal (Canada)
Matteo Cacciatore - HEC Montreal (Canada) [presenting]
Abstract: Novel insights on the role of international trade following unanticipated government spending and income tax changes in a flexible exchange rate environment are presented. We show fiscal multipliers can be larger in economies more open to trade, even when fiscal expansions imply a trade deficit. For a given trade openness and trade elasticity, the details of the fiscal environment---the relative composition of public and private imports and how the government finances its budget---dictate whether trade linkages enhance a fiscal stimulus. We demonstrate these ambiguous effects analytically in a simple two-country, two-good model. Using a Bayesian prior-predictive analysis, we show a quantitative international business-cycle model---featuring a rich fiscal specification and microfounded trade structure---bears the same agnostic predictions. We estimate the model on Canadian and U.S. data and find medium-run Canadian government spending multipliers are higher than in a counterfactually closed economy. Income tax cuts generate lower multipliers but are more effective in inducing positive cross-country comovement.