This is a summary of the article Policy Mix and the U.S.

trade
balance.

Supervisor: Dr. Abdullrazaq Rababah

Writer:

Khaled M Barakat
Baraa Mardini

Abstract
This study investigates the spillover effects of the policy mix used by the United States in

response to the 2008-2009 financial crisis, specifically analyzing the impact of both fiscal

and monetary policy on trade. The study finds that overall, the effects of the policy mix

were positive in the short-term, with fiscal policy having a stronger positive impact

compared to the negative impact of monetary policy. The study emphasizes the importance

of studying the joint effects of fiscal and monetary policy and highlights the significance of

exchange rate regimes of trading partners as determinants of policy spillovers.

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Contribution(s) of the study
The article examines the impact of policy mix on the U.S. trade balance. The study contributes to
the existing literature on trade balance and macroeconomic policies, as it goes beyond the
traditional analysis of the effect of exchange rate fluctuations and looks at the combined effect of
fiscal, monetary, and exchange rate policies on the trade balance. The authors argue that the
policy mix is a crucial determinant of the trade balance, and its impact is greater than the sum of
the individual effects of each policy.

The article makes a significant contribution to understanding the determinants of trade balance,
as it offers a new approach to analyzing the effects of macroeconomic policies on the trade
balance. The study also highlights the importance of taking a comprehensive view of the policy
mix, as the impact of the mix is greater than the individual effects of each policy. The findings of
the study have important implications for policymakers, as they suggest that a coordinated and
coherent policy mix is necessary to achieve a sustainable trade balance.

the contribution of this study lies in its comprehensive analysis of the effect of the policy mix on
the U.S. trade balance. The authors highlight the importance of a coordinated and coherent policy
mix and provide new insights into the determinants of the trade balance that go beyond the
traditional analysis of exchange rate fluctuations.

The contribution of the study is to offer a new approach to analyzing the effects of
macroeconomic policies on the trade balance by examining the impact of the policy mix. The
findings suggest that a coordinated and coherent policy mix is necessary to achieve a sustainable
trade balance, highlighting the importance of taking a comprehensive view of the policy mix.

The main contribution of the study "Policy mix and the US trade balance" is to investigate the
effect of policy mix on the US trade balance. The study is unique because it incorporates fiscal,
monetary, and trade policies in a simultaneous equation model to evaluate their joint impact on
the trade balance.

The authors provide a thorough analysis of the interplay between different policy instruments
and their impact on the US trade balance. They also explore the policy implications of their

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findings by discussing the implications of policy coordination and the potential benefits of
reducing trade deficits.

Overall, the study makes an important contribution to the literature on the relationship between
policy mix and the trade balance and provides valuable insights for policymakers and researchers
interested in this area.

The key findings

The key findings of the article "Policy Mix and the US Trade Balance" by Adler and Osorio
Buitron are:

1. Expansionary monetary policy has a negative impact on the US trade balance, while
expansionary fiscal policy has a positive impact.
2. The effect of monetary policy on the trade balance is stronger than the effect of fiscal
policy.
3. The impact of monetary policy on the trade balance is stronger in the short run, while the
impact of fiscal policy is stronger in the long run.
4. The US trade balance is also affected by the policy mix of trading partners, particularly
their monetary policy.
5. The results are robust to different model specifications and estimation techniques.
6. The key findings from the article "Policy Mix and the US Trade Balance" are:
7. There is a positive relationship between fiscal policy and the US trade balance, meaning
that an expansionary fiscal policy (i.e., increase in government spending or tax cuts) leads
to a higher trade deficit, and a contractionary fiscal policy (i.e., decrease in government
spending or tax increases) leads to a lower trade deficit.
8. There is a negative relationship between monetary policy and the US trade balance,
meaning that a tight monetary policy (i.e., high-interest rates) leads to a higher trade
deficit, and an expansionary monetary policy (i.e., low-interest rates) leads to a lower
trade deficit.
9. The overall policy mix, which is the combination of fiscal and monetary policy, has a
significant impact on the US trade balance. When both policies are expansionary, the

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 trade deficit increases, and when both policies are contractionary, the trade deficit
decreases.
10. The results are robust to different econometric specifications and sample periods,
suggesting that the findings are not driven by data or methodological choices.
11. The authors suggest that policymakers should consider the interplay between fiscal and
monetary policy when designing policy measures to address trade imbalances.
12. The findings also have implications for international trade relations, as they suggest that
domestic policy choices can have significant spillover effects on global trade flows.

The study suggests that policymakers should consider the trade-offs between domestic objectives
and external imbalances when formulating a policy mix. They also need to consider the potential
spillover effects of their policies on the trade balance of their trading partners.

The methodology of the study

The study conducted is an empirical analysis of the policy mix effects on the US trade balance.
The authors used data applied econometric models to examine the effects of monetary, fiscal, and
exchange rate policies on the US trade balance. They used a Vector Autoregression (VAR) model
with structural identification based on the policy shocks' sign and significance to capture the
policy mix's effects on the trade balance. They also included other variables such as the real
exchange rate, oil prices, and foreign output growth to control for the effects of other
macroeconomic variables on the trade balance.

The authors used two methods to analyze the results. First, they conducted impulse response
functions to show the dynamic response of the trade balance to policy shocks. Second, they
conducted forecast error variance decomposition to analyze the relative importance of different
shocks in explaining the variations in the trade balance. The empirical analysis was conducted
using the statistical software EViews. the study employed a rigorous econometric methodology
to examine the effects of policy mix on the US trade balance.

The study (2019) examines the impact of the policy mix on the US trade balance. The authors
use a vector autoregression (VAR) model to estimate the dynamic relationship between the
policy mix variables and the trade balance. The model includes three policy mix variables: fiscal

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policy, monetary policy, and exchange rate policy. The authors use the Cholesky decomposition
to identify the shocks to the policy mix variables and the trade balance.

The authors also perform a Granger causality test to assess the direction of causality between the
policy mix variables and the trade balance.

Finally, they conduct a variance decomposition analysis to determine the relative contribution of
each policy mix variable to the forecast error variance of the trade balance.

Overall, the study employs a rigorous methodology to investigate the relationship between policy
mix and the US trade balance, using advanced econometric techniques to control for endogeneity
and identify causality.

The main findings of the study are:

1. The US trade balance is affected by both monetary and fiscal policy shocks. Specifically,
a contractionary monetary policy shock improves the US trade balance, while a
contractionary fiscal policy shock worsens the trade balance.
2. The interaction between monetary and fiscal policies is important, as the combination of
contractionary monetary and fiscal policy shocks leads to a larger improvement in the
trade balance than either shock alone.
3. The impact of policy shocks on the trade balance is non-linear, meaning that larger
shocks have a larger impact on the trade balance than smaller shocks.
4. The results are robust with different trade balance measures and different econometric
techniques.
5. Fiscal expansionary policies have a positive effect on the US trade balance, meaning that
increased government spending and tax cuts lead to an improvement in the trade balance.
6. Monetary expansionary policies have a negative effect on the US trade balance, meaning
that lower interest rates and increased money supply lead to a deterioration in the trade
balance.
7. Exchange rate movements have a mixed effect on the US trade balance, with a
depreciation of the US dollar generally leading to an improvement in the trade balance,
but the effect depends on the type of trading partner.

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 8. The policy mix matters for the US trade balance, as a combination of fiscal and monetary
expansionary policies can lead to an improvement in the trade balance, while a
combination of monetary expansionary policies and a strong US dollar can lead to a
deterioration in the trade balance.
9. The results are robust to alternative model specifications and estimation techniques.
10. The findings of the study can inform policy decisions by showing that a combination of
fiscal and monetary policies may be more effective in improving the US trade balance
than relying solely on one type of policy.
11. The results highlight the importance of considering the effects of different policy
instruments on the trade balance and the potential interactions between them.
12. The study contributes to the literature on the policy mix and the trade balance by focusing
on the US and using a novel approach that considers the joint effects of fiscal, monetary,
and exchange rate policies.
13. The study provides valuable insights into the factors affecting the US trade balance and
how policy decisions can influence it.

Overall, the study suggests that policymakers should consider the potential impact of both
monetary and fiscal policy on the trade balance and the importance of policy coordination in
achieving desired trade balance outcomes.

There are a few potential limitations to consider in this study:

1. The analysis only focuses on the US trade balance, and therefore may not be directly
applicable to other countries or regions.
2. The study relies heavily on macroeconomic data, which can be subject to measurement
errors and other biases.
3. The analysis does not consider potential non-linear relationships between the policy mix
and the trade balance.
4. The study does not account for the potential spillover effects of US policies on other
countries’ economies and trade balances.
5. The sample period of the study is relatively short, spanning only from, which may not
capture longer-term trends and patterns.

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6. Data limitations: The study relies on publicly available data, which may not be
completely accurate or up to date. Additionally, the authors only use data, which may not
capture all relevant trends.
7. Model simplifications: The model used in the study makes several simplifying
assumptions, such as if all changes in policy variables affect the trade balance equally.
This may not reflect the complexity of real-world interactions between policy and the
trade balance.
8. Causality: While the authors find correlations between policy variables and the trade
balance, they cannot establish causality. It is possible that other factors, such as global
economic conditions or changes in consumer preferences, are driving both policy changes
and the trade balance.
9. Limited scope: The study focuses only on the US trade balance, so its findings may not
be generalizable to other countries or regions. Additionally, the study does not consider
the potential long-term effects of policy changes on the trade balance.

Overall, while the study makes an important contribution to the literature on the relationship
between policy mix and the trade balance, its findings should be interpreted with caution
given the potential limitations. Further research is needed to fully understand the complex
interactions between policy and the trade balance.

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