Macroeconomics › Section R · The impacts of government borrowing › Topic R.2

Fiscal policy and the trade balance

A government that borrows heavily can end up importing more than it exports, as foreign savings flow in to fund the gap. The link runs through spending, interest rates and the exchange rate, and when the inflow turns into an outflow it can end in crisis.

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In this topic

From one deficit to another
The spending channel
The exchange-rate channel
Worked example: the currency effect
Twin deficits, but not always
Worked example: cutting the budget deficit
When inflows become dangerous
Inflation and default fears
Using fiscal policy on a trade deficit
Common mistakes to avoid
Key takeaways

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