The Global Effects of U.S. Fiscal Policy

That's the title of a discussion paper (pdf) by Kimberly Flood at the Bank of Canada. This is from the conclusion:

The results of our U.S. fiscal policy simulations show that the expiration of the tax relief from the AMT and the expiration of the tax cuts enacted in 2001 and 2003 can impose short-run economic costs to the U.S. economy. However, in the long run, aggregate demand in the United States and the rest of the world benefits from the expiration of AMT relief and the 2001 and 2003 tax cuts, owing mainly to a corresponding fall in the world real interest rate. Furthermore, the simulations highlight the potentially important role that U.S. fiscal policy adjustment can play in the unwinding of global current account imbalances. In particular, the increase in taxes associated with the expiration of relief from the AMT relief and the expiration of the 2001 and 2003 tax cuts can result in an improvement in the U.S. current account deficit. Nevertheless, this improvement is small compared with the size of the adjustment required to reverse global current account imbalances: U.S. fiscal policy is only one factor behind such imbalances, and will therefore be only part of a successful adjustment package.

The results of our study suggest that the initial expiration of relief from the AMT will:

• reduce the level of U.S. real GDP by 0.1 per cent, on average, over the first five years following the expiration of AMT relief, and increase real GDP by about 0.5 per cent in the long run
• improve the U.S. current account-to-GDP ratio by about 0.2 percentage points in the long run
• increase the level of Canadian real GDP by about 0.5 per cent in the long run

The results of our study also suggest that the expiration of the 2001 and 2003 tax cuts will:

• reduce the level of U.S. real GDP by an average of 0.2 per cent over the first five years following the shock, and increase real GDP by about 1.5 per cent in the long run
• improve the U.S. current account-to-GDP ratio by 0.7 percentage points in the long run
• increase the level of Canadian real GDP by about 1.5 per cent in the long run

Memo to the US Democratic Party from the rest of the world: Please get your act together and win the election. Thank you.