Key Takeaways
- Fiscal and exchange rate policies are major drivers of trade (current account) imbalances. Raising the fiscal balance by $1 raises the current account by $0.30. Buying $1 of foreign exchange reserves raises the current account roughly $0.50 or more.
- These effects are apparent in both advanced and developing economies.
- Other important drivers include productivity growth rates, per capita income, and demographic trends.
- Tariffs, on the other hand, do not have a major impact on trade balances.
Body
Global trade imbalances have gained attention following President Donald Trump's reelection, with China's trade surplus increasing and the US trade deficit remaining historically high. This paper estimates models that can explain nearly half of the historical imbalances, with a large share of the imbalances arising from government policies. The evidence strongly suggests that governments can buy current account surpluses. The paper extends previous research (Gagnon and Sarsenbayev 2021) by six years and roughly 1,000 observations.
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