Trade Flows and Fiscal Multipliers

• Published in: NBER Working Paper Series
• Main Authors: Cacciatore, Matteo, Traum, Nora
• Format: Paper
• Language: English
• Published: Cambridge National Bureau of Economic Research, Inc 01.08.2020
• Subjects: Economic theory
• ISSN: 0898-2937
• DOI: 10.3386/w27652

We present novel insights on the role of international trade following unanticipated government spending and income tax changes in a flexible exchange rate environment. In a simple two-country, two-good model, we show analytically that fiscal multipliers can be larger in economies more open to trade, even when fiscal expansions imply a trade deficit. Cross-country comovement can be positive or negative. Three factors determine how trade linkages affect fiscal multipliers: the relative import share of public and private goods, how the government finances its budget, and the currency invoicing of exports. A Bayesian prior-predictive analysis shows a quantitative international business-cycle model bears the same predictions. Estimating the model on Canadian and U.S. data, we find support for larger multipliers relative to a counterfactually closed economy and positive cross-country spillovers.