Elementary Open Economy Macroeconomics

Menzie Chinn finds an error in the 2006 Economic Report of the President:

Econbrowser: Open Economy Macro in the 2006 Economic Report of the President : One virtue of the ERPs of the past has been the caveats that are usually attached to strong assertions of economic behavior. But in this edition, there is an uncharacteristically unhedged assertion on page 146:

The interdependence of the global financial system implies that no one country can reduce its external imbalance through policy action on its own. Instead, reducing external imbalances requires action by several countries. Specifically, at least four steps may help to reduce these imbalances.

But this is not true, even taking the chapter... at face value. In box 6-3 assessing "the link between fiscal and trade deficits", the authors cite favorably the Fed's estimate of an elasticity between fiscal and trade deficits of 0.20. [I.e., that if you cut the budget deficit by $5 you cut the trade deficit by $1, without any policy action by other countries.] They don't note that this result from a calibrated model (Sigma) is at the low end of the estimates. The OECD macroeconometric model incorporates an elasticity of about 0.40 [i.e., $5 gets you $2], while the IMF's calibrated model implies an elasticity of 0.50 [i.e., $5 gets you $2.50].