How would the Swedish economy be affected by a fiscal tightening in the USA?

The US federal government’s debt-to-GDP ratio is close to historically high levels and many analysts say that this development is not sustainable. This Economic Commentary estimates the impact on the Swedish economy in a hypothetical scenario where fiscal policy in the United States is gradually tightened to stabilise the federal debt-to-GDP ratio.

The Swedish economy could then be affected mainly via two channels: the trade channel and the financial channel. A tighter US fiscal policy would dampen demand for imports, which would have a negative impact on Swedish exports. A tightening could also weaken the dollar and thus strengthen the krona, further weakening export prospects.

The effects via the financial channel – on interest rates and the exchange rate – can be either positive or negative for the Swedish economy. It depends on the prevailing economic conditions and market confidence in the US plan for tightening.

Compared to studies estimating the spillover effects of a US fiscal shock on the EU, this analysis indicates that Swedish GDP would be slightly more affected than the EU as a whole. One possible explanation is that the Swedish economy is more open, which amplifies the effects of the trade and exchange rate channel.

Author: Peter Sheikh Kvarfordt, who works at the Monetary Policy Department