Credit Cycles, Fiscal Policy, and Global Imbalances

February 19, 2021

Preview Citation

Format: Chicago

Callum Jones, and Pau Rabanal. Credit Cycles, Fiscal Policy, and Global Imbalances, (USA: International Monetary Fund, 2021) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.

Subject: Economic sectors, Financial crises

Keywords: Credit cycles, Current account balances, Fiscal policy, Macroprudential policies.

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/043
Stock No:

WPIEA2021043
ISBN:

9781513570013
ISSN:

1018-5941

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