Budget Deficits and the Balance of Trade

The object of this chapter is to identify historical relationships between fiscal policy and the current account for the United States and five of its major trading partners. I attempt to provide some measures of the extent to which variations in budget deficits explain variations in current account balances, both across time and across countries. Overall, the evidence corroborates the view that fiscal deficits significantly contribute to a deterioration of the current account. Indeed, it appears that US budget deficits have been responsible for roughly one-third of the US trade deficit in recent years.