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Fiscal Policies, External Deficits, and Budget Deficits

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Abstract

This paper studies the effects of fiscal policies on external and budget deficits. From a tractable small open-economy, overlapping-generation model, the effects are measured by the responses of the external deficit to an increase in the budget deficit due to a tax-cut. The responses are positively affected by the birth rate and the degree of persistence of the budget deficit. Empirical results for the G7 countries over the post-1975 period reveal that the values of birth rate are small for all, but one, countries; but the responses of external and budget deficits are substantial and persistent for most countries. In particular, the fiscal policy has the most important effects on the external deficits for Canada, Japan, and the United States; somewhat smaller impacts for France, Germany, and the United Kingdom; and negligible effects for Italy.

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Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 06-05.

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Length: 52 pages
Date of creation: May 2006
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Handle: RePEc:iea:carech:0605

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Keywords: Agents’ superior information; birth rate; impact and dynamic responses; G7 Countries; orthogonality restrictions.;

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Cited by:
  1. Foued Chihi & Michel Normandin, 2008. "External and Budget Deficits in Developing Countries," Cahiers de recherche, CIRPEE 0819, CIRPEE.
  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, Palgrave Macmillan, vol. 59(4), pages 603-629, November.

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