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Balancing the federal budget and U.S. international trade deficits


Abstract: Eliminating the federal budget deficit, even assuming a correspondingly higher national rate, is likely to yield only a modest reduction in the U.S. international trade deficit. Balancing the federal budget will help improve the trade balance through the effects of lower levels of aggregate demand. But it will almost certainly not cause a large switch of U.S. and foreign demand from goods produced abroad to goods produced in the United States. Such a shift of demand toward U.S. goods is necessary to close the trade gap, and will be difficult to accomplish in the face of the trade competition between the U.S. and low-wage, export-oriented economies, and high international capital mobility.

Keywords: Fiscal policy; Budget deficits; Balance of trade;

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Provider: Federal Reserve Bank of New York

Part of Series: Research Paper

Publication Date: 1996

Number: 9638