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Ms. Adina Popescu and Mr. Ippei Shibata
This note analyzes the impact of preannounced government spending shocks in the United States on the real effective exchange rate and the trade balance. Using a vector autoregression framework that allows anticipated fiscal shocks to be identified using survey information, we find that preannounced spending shocks lead to a sizable real effective dollar appreciation and a worsening of both the aggregate trade balance and bilateral trade balances in a panel of partner countries. The results are robust to controlling for country-specific variables like the macroeconomic and policy conditions in the recipient countries, are generalized across regions and might have decreased during the zero-interest-lower-bound regime.
Ms. Adina Popescu and Mr. Ippei Shibata

Spillovers from us Government Spending Shocks: Impact on External Positions This note analyzes the impact of preannounced government spending shocks in the United States on the real effective exchange rate and the trade balance. Using a vector autoregression framework that allows anticipated fiscal shocks to be identified using survey information, we find that preannounced spending shocks lead to a sizeable real effective dollar appreciation and a worsening of both the aggregate trade balance and bilateral trade balances in a panel of partner countries. The

Mary E. Burfisher, Frederic Lambert, and Mr. Troy D Matheson

Front Matter Page Western Hemisphere Department Contents ABSTRACT I. INTRODUCTION II. MODEL III. DATABASE AGGREGATION IV. SCENARIO V. RESULTS OF SCENARIO VI. SUMMARY AND CONCLUSIONS VII. REFERENCES VIII. APPENDIX TABLES 1. Split of GTAP Motor Vehicle Sector 2. USMCA Model Scenario 3. Ad Valorem Equivalents of Non-Tariff Measures 4. Effects of USMCA on Welfare 5. Effects of USMCA on Real GDP 6. Effects of USMCA on Real Exchange Rate 7. Changes in Aggregate Trade Balances 8. Changes in Bilateral Trade Balances

Ms. Margaux MacDonald, Mr. Roberto Piazza, Johannes Eugster, and Ms. Florence Jaumotte
Based on an empirical gravity model of sectoral bilateral trade, we uncover three features of bilateral trade balances. First, the difficulty of gravity models in fitting the observed level of bilateral balances is likely due to the presence of unobservable bilateral trade costs. Second, the model fit improves drastically when we focus on changes over time of the balances. Third, using a log linear approximation we show that changes in bilateral trade balances over the past two decades were driven almost entirely by changes in the same macro factors that determine countries’ aggregate balances – changes in bilateral trade costs, including tariffs, played therefore only a negligible role. This conclusion provides new support for the view that bilateral balances are, for practical purposes, not relevant to the conduct of macroeconomic policy.
Johannes L. Eugster, Ms. Florence Jaumotte, Ms. Margaux MacDonald, Mr. Roberto Piazza, and Oya Celasun

expressed in real terms. Economists have devoted significant efforts to understand the determinants of countries’ aggregate external imbalances. Much less attention has instead been given to the detailed exploration of the determinants of bilateral balances. The “common wisdom” among economists is that aggregate trade balances are linked to the evolution of macroeconomic factors that are relatively independent from a single trade relation and that affect a country’s saving-investment balance. From this perspective, the exact way in which aggregate trade balances are

Ms. Margaux MacDonald, Mr. Roberto Piazza, Johannes Eugster, and Ms. Florence Jaumotte

.” Journal of International Economics Vol. 62 ( 1 ): 53 – 82 , January . 10.1016/j.jinteco.2003.07.001 Silva , J. M. C. Santos and Silvana Tenreyro . 2006 . “ The Log of Gravity .” The Review of Economics and Statistics Vol. 88 ( 4 ): 641 – 658 . 10.1162/rest.88.4.641 Wei , Shang-Jin . 1996 . “ Intra-National versus International Trade: How Stubborn are Nations in Global Integration? ”. NBER Working Paper 5531 . Appendix 1 This appendix derives the relation between bilateral and aggregate trade balances presented in equation

International Monetary Fund

adjustment is not being vitiated through exchange rate manipulation. 2 Such estimates may also have a useful bearing on current efforts to extend CGER-type analysis to emerging market countries. 3 2. While there is an extensive academic literature on estimating “trade equations” (Appendix I), most studies focus on specific goods, or on imports, or on exports (but not both), making it difficult to infer the impact on the aggregate trade balance. Yet, from a macroeconomic perspective, it is this aggregate effect that is of importance. Moreover, most studies are based on

Mr. Benjamin L Hunt, Susanna Mursula, Mr. Rafael A Portillo, and Marika Santoro

also Erceg et al, 2008 ). Table C.4 , Appendix C , summarizes the bilateral trade flows as a share of GDP between all six regions, from the perspective of exports of each region. These flows include the export and import of intermediate and final (consumption and investment) goods. 10 We calibrate the model in its initial steady state assuming that the aggregate trade balance for each region is zero. 11 Hence, the flows in the table reflect the relative importance of trading partners for each region not necessarily single absolute magnitude of bilateral flows