A structural decomposition of the U.S. trade balance: Productivity, demographics and fiscal policy

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2010.04.004 Byline: Andrea Ferrero Abstract: The US external deficits have been the most striking manifestation of global imbalances. This paper investigates the contribution of productivity growth, demographics and fiscal policy in accounting for the evolution of the US external imbalances against industrialized countries during the last three decades. Productivity growth plays a dominant role. Demographics explain a non-negligible and nearly permanent component of the US trade deficit. Furthermore, the international demographic transition is crucial for large US external imbalances to be consistent with the persistent decline of world real interest rates observed in the data. Fiscal policy is of minor importance. Author Affiliation: Federal Reserve Bank of New York, New York, NY 10045, USA Article History: Received 26 June 2008; Revised 6 April 2010; Accepted 6 April 2010 Article Note: (footnote) [star] I am indebted to David Backus, Pierpaolo Benigno, and especially Mark Gertler for their guidance and advice. I am grateful to the editor of this journal, Robert King, the associate editor, Mario Crucini, and an anonymous referee for useful criticisms and suggestions, and to Cedric Tille for his discussion. I have also benefited from comments by seminar participants at various universities, institutions and conferences. All errors are exclusively my own responsibility. The views expressed in this paper do not necessarily reflect the position of the Federal Reserve Bank of New York or of the Federal Reserve System.