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Twin Deficits versus Unpleasant Fiscal Arithmetic in a Small Open Economy

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  • Kawai, Masahiro
  • Maccini, Louis J

Abstract

This paper studies fiscal deficits, consumption-saving behavior, current account imbalances, and exchange rates in a small open economy populated by households with finite lives. Suppose the government undertakes a bond-financed tax cut today. The authors find that if tax finance is anticipated primarily to be used in the future to close the deficit then 'twin deficits' will be observed today, but if money finance is anticipated primarily to be used in the future then current fiscal deficits will induce a decline in current consumption, thus creating trade surpluses, a result they term 'unpleasant fiscal arithmetic.' Copyright 1995 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 3 (August)
Pages: 639-58

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:639-58

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Richard Cantor & Robert Driskill, 1996. "Can a fiscal contraction strengthen a currency?: Some doubts about conventional Mundell-Fleming results," Research Paper 9629, Federal Reserve Bank of New York.
  2. S M Ali Abbas & Jacques Bouhga-Hagbe & Antonio Fat�s & Paolo Mauro & Ricardo C Velloso, 2011. "Fiscal Policy and the Current Account," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 603-629, November.
  3. Budina, Nina & Van Wijnbergen, Sweder, 2000. "Fiscal deficits, monetary reform, and inflation stabilization in Romania," Policy Research Working Paper Series 2298, The World Bank.
  4. repec:ebl:ecbull:v:5:y:2007:i:7:p:1-12 is not listed on IDEAS
  5. Giancarlo Marini & Giovanni Piersanti, 2003. "Fiscal Deficits and Currency Crises," CEIS Research Paper 15, Tor Vergata University, CEIS.
  6. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
  7. Shankar Prasad Acharya, 2009. "Verification of Causality through VAR and Intervention Analysis: Econometric Modeling on Budget Deficit and Trade Deficit in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 21, pages 1, April.
  8. Barbara Annicchiarico, 2003. "Fiscal Policy and Exchange Rates," CEIS Research Paper 7, Tor Vergata University, CEIS.

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