US TRADE BALANCE DYNAMICS - THE ROLE OF FISCAL-POLICY AND PRODUCTIVITY SHOCKS AND OF FINANCIAL MARKET LINKAGES

This paper examines whether domestic and foreign productivity and fisc al policy changes can account for the wide swings in US net exports du ring the period 1975-1991. A two-country Real Business Cycle model is used for that purpose. The model is simulated using data on productivi ty, government purchases and taxes, for the G7 countries. A version of the model with incomplete asset markets, in which only bonds can be u sed for international capital flows, tracks the US trade balance fairl y closely, provided permanent country-specific productivity shifts are assumed. The simulations suggest that US productivity changes were th e main source of fluctuations in US net exports. (C) 1998 Elsevier Sci ence Ltd. All rights reserved.