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Menzie Chinn: Budget Deficits and Trade Deficits

He writes:

Econbrowser: The December Trade Release: Beyond the Surprise: let me step back from the micro aspects of the trade balance, and think about how fiscal policy affects the trade deficit.... [W]ith multiple shocks, even in a simple Keynesian model, the two can diverge. What is true is that when fiscal shocks predominate, the two series will tend to covary.... [I]n a simple Keynesian model with investment, a positive shock to investment will drive up tax receipts and drive down the trade balance. When fiscal shocks are large (such as after 2001), we see a correlation, albeit with a lag...

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