Advanced Search
MyIDEAS: Login to save this article or follow this journal

Budget deficit persistence and the twin deficits hypothesis

Contents:

Author Info

  • Normandin, Michel

Abstract

This paper gauges the causal relationship between external and budget deficits by using Blanchard's overlapping generations model. This model sests the twin deficits hypothesis (i.e. there is a positive relationship between the deficits) and the Ricardian equivalence hypothesis (i.e. there is no link between the deficits). This model also implies that consumers forecast future budget deficits using (at least) the history of the two deficits. This implication is used to derive time series restrictions, which are testable for given comsumer's planning horizons. For the relevant horizon, the response of the external deficit to an increase in the budget deficit is computed. For the Canadian and the U.S. economies, the relevant horizons can be as long as 83 years. However, given the persistence of the budget deficits, these horizons produce responses that are statistically significant. These findings reconcile the mixed results obtained in previous analyses. Cette étude évalue la relation de causalité entre les déficits extérieur et budgétaire à partir du modèle de générations imbriquées proposé par Blanchard (1985). Ce modèle emboîte l'hypothèse des déficits jumeaux (i.e. il y a une relation positive entre les déficits) et l'hypothèse d'équivalence ricardienne (i.e. il n'y a aucun lien entre les déficits). Aussi, ce modèle implique que les consommateurs prévoient les déficits budgétaires futurs en considérant l'évolution des deux déficits. Cette implication permet de dériver des restrictions pouvant être testées pour certains horizons de planification des consommateurs. Pour les horizons pertinents, la réponse du déficit extérieur à une augmentation du déficit budgétaire est calculée. Pour les économies canadienne et américaine, les horizons pertinents peuvent être aussi longs que 83 ans. Compte tenu de la persistance des déficits budgétaires, ces horizons procurent toutefois des réponses qui sont statistiquement significative

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V6D-3X4WMMW-8/2/5aabb40acd02c8d1014d4b5c827724d8
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 49 (1999)
Issue (Month): 1 (October)
Pages: 171-193

as in new window
Handle: RePEc:eee:inecon:v:49:y:1999:i:1:p:171-193

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(1), pages 34-58, February.
  2. Henning Bohn, . "Budget Deficits and Government Accounting," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 28-91, Wharton School Rodney L. White Center for Financial Research.
  3. Reuven Glick & Kenneth Rogoff, 1992. "Global Versus Country-Specific Productivity Shocks and the Current Account," NBER Working Papers 4140, National Bureau of Economic Research, Inc.
  4. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
  5. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C94-044, University of California at Berkeley.
  6. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, Elsevier, vol. 29(3-4), pages 237-253, November.
  7. W. Michael Cox & Joseph Haslag, 1986. "The Market Value of Government of Canada Debt, Monthly, 1937-84," Canadian Journal of Economics, Canadian Economics Association, vol. 19(3), pages 469-97, August.
  8. Gregory, Allan W & Veall, Michael R, 1985. "Formulating Wald Tests of Nonlinear Restrictions," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1465-68, November.
  9. Henning Bohn, . "Budget Balance Through Revenue or Spending Adjustments ? Some Historical Evidence for the United States (Reprint 013)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 03-91, Wharton School Rodney L. White Center for Financial Research.
  10. Evans, Paul, 1988. "Are Consumers Ricardian? Evidence for the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 983-1004, October.
  11. Bohn, Henning, 1992. "Budget deficits and government accounting : Reply to Allan Drazen," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 37(1), pages 93-95, December.
  12. Plosser, Charles I., 1982. "Government financing decisions and asset returns," Journal of Monetary Economics, Elsevier, Elsevier, vol. 9(3), pages 325-352.
  13. Odysseus Katsaitis, 1987. "On the Substitutability between Private Consumer Expenditure and Government Spending in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 533-43, August.
  14. Bohn, H., 1991. "Budget Balance Through Revenue or Spending Adjustments? Some Historical Evidence for the United States," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 3-91, Wharton School - Weiss Center for International Financial Research.
  15. Evans, Paul, 1988. "Are Government Bonds Net Wealth? Evidence for the United States," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 26(4), pages 551-66, October.
  16. Roubini, N., 1989. "Current Account And Budget Deficits In An Intertemporal Model Of Consumption And Taxation Smoothing. A Solution To The "Feldstein-Horioka" Puzzel," Papers, Yale - Economic Growth Center 569, Yale - Economic Growth Center.
  17. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 7-46, May.
  18. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  19. Poterba, James M. & Summers, Lawrence H., 1987. "Finite lifetimes and the effects of budget deficits on national saving," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 369-391, September.
  20. Leonardo Leiderman & Assaf Razin, 1987. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," NBER Working Papers 2258, National Bureau of Economic Research, Inc.
  21. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 223-47, April.
  22. Evans, Paul, 1993. "Consumers Are Not Ricardian: Evidence from Nineteen Countries," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 31(4), pages 534-48, October.
  23. Haug, Alfred A, 1990. "Ricardian Equivalence, Rational Expectations, and the Permanent Income Hypothesis," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 22(3), pages 305-26, August.
  24. David Johnson, 1986. "Consumption, Permanent Income, and Financial Wealth in Canada: Empirical Evidence on the Intertemporal Approach to the Current Account," Canadian Journal of Economics, Canadian Economics Association, vol. 19(2), pages 189-206, May.
  25. Ahmed, Shaghil, 1986. "Temporary and permanent government spending in an open economy: Some evidence for the United Kingdom," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(2), pages 197-224, March.
  26. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  27. Ahmed, Shaghil, 1987. "Government spending, the balance of trade and the terms of trade in British history," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 195-220, September.
  28. Evans, Paul & Hasan, Iftekhar, 1994. "Are consumers Ricardian? Evidence for Canada," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 34(1), pages 25-40.
  29. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  30. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, Elsevier, vol. 26(3), pages 433-452, December.
  31. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 84(2), pages 147-59.
  32. Otto, Glenn, 1992. "Testing a present-value model of the current account: Evidence from US and Canadian time series," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(5), pages 414-430, October.
  33. Hercowitz, Zvi, 1986. "On the determination of the external debt: The case of Israel," Journal of International Money and Finance, Elsevier, Elsevier, vol. 5(3), pages 315-334, September.
  34. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 68-87, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:49:y:1999:i:1:p:171-193. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.