The Impact of Foreign Slowdown on the U.S. Economy: An Open Economy DSGE Perspective

Abstract

Over the course of 2018, economic activity in major advanced foreign economies and emerging markets—including the Euro area and China—decelerated noticeably. In parallel, foreign growth projections for 2019 and 2020 were revised down, signaling potentially large headwinds for the U.S economy over the medium term. In this article, we use a multi-country simulation model to quantify economic spillovers to the United States from a slowdown originating in the Euro area. Next, we compare these results with spillovers from a slowdown originating in China. We find that spillovers to the U.S. economy from a slowdown in the Euro area are sizable, mainly due to lack of monetary policy space in the region along with greater financial integration between Europe and the United States. Standard trade-related spillovers from a slowdown in China to the United States, instead, are quantitatively limited.