Trade Flows and Fiscal Multipliers

Abstract We present novel insights on the role of international trade following unanticipated fiscal changes in a flexible exchange rate environment. show analytically that multipliers can be larger economies more open to trade, even when expansions imply deficits. Three factors determine how linkages matter: relative import share public and private goods, financing government debt, currency invoicing exports. A Bayesian prior-predictive analysis shows quantitative model bears same predictions. Conditioning Canadian U.S. data, we find support for counterfactually closed economy.