United States Fiscal Policy:Its Effects at Home and Abroad

Would reducing the federal budget deficit improve the trade balance? Does a move toward fixed exchange rates make sense when efforts to control budget deficits are under way? Can the United States conduct tax and budget policy without paying attention to its implications for the rest of the world?

In two essays, John H. Makin traces the unusual path of US fiscal policy in the first half of the 1980s. He finds lessons helpful to businesses and policymakers as the world economy becomes more interdependent and the international competition more intense. His major conclusion is that fiscal policy is a more potent countercyclical tool than monetary policy under flexible exchange rates. Stabilizing exchange rates would therefore require active coordination of fiscal policies and monetary coordination.