Columbia International Affairs Online: Working Papers

CIAO DATE: 05/2012

Global fiscal adjustment and trade rebalancing

YingYing Lu, Professor Warwick McKibbin, Andrew Stoeckel

March 2012

Lowy Institute for International Policy

Abstract

The emergence of substantial fiscal deficits and a large build-up of government debt in major advanced economies will inevitably lead to a period of fiscal consolidation in coming years. In an earlier paper, McKibbin and Stoeckel (2010) explored the effects of this fiscal adjustment in advanced economies on the global economic outlook. This paper focuses on the differences between the impacts of fiscal policy in advanced versus emerging economies. In particular, the need for more fiscal spending on infrastructure in emerging economies and the need for fiscal consolidation in advanced economies leads naturally to the question of what this asymmetric fiscal adjustment might do to global trade balances as well as global economic growth over the coming decades.