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Fiscal Deficits and Current Account Deficits

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  • Michael Kumhof
  • Douglas Laxton

Abstract

The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and almost 100 percent for a small open economy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/237.

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Length: 35
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/237

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Keywords: Budget deficits; Economic models; Fiscal sustainability; Gross domestic product; Public debt; Savings; current account; fiscal deficits; government debt; fiscal policy; government spending; fiscal stimulus; current account deficit; fiscal deficit; taxation; budget constraint; current account deficits; government deficits; tax cuts; account deficits; government deficit; increase in consumption; aggregate demand; fiscal instrument; domestic currency; tax income; expansionary fiscal; current accounts; primary deficit; current account balance; interest expenditure; fiscal shocks; balance of payments; current account balances; international debt; central bank; fiscal outlook; fiscal policies; tax changes; tax base; fiscal policy on consumption; tax policy; reserve bank; tax cut; fiscal issues; fiscal crisis; government budget; foreign borrowing; fiscal accounts; debt management; government revenue; debt stocks; national debt; debt ratio; debt stock; government budget constraint; stock of debt; fiscal consolidation; tax payments; fiscal multipliers; international lending; fiscal model; tax revenues; debt dynamics;

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References

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Citations

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Cited by:
  1. Kumhof, Michael & Laxton, Douglas, 2013. "Fiscal deficits and current account deficits," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2062-2082.
  2. Ali Abbas, S.M. & Bouhga-Hagbe, Jacques & Fatás, Antonio & Mauro, Paolo & Velloso, Ricardo C., 2010. "Fiscal Policy and the Current Account," CEPR Discussion Papers 7859, C.E.P.R. Discussion Papers.
  3. Kumhof, Michael & Laxton, Douglas & Leigh, Daniel, 2014. "To starve or not to starve the beast?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 1-23.
  4. Mourinho Félix, Ricardo & Almeida, Vanda & Castro, Gabriela, 2008. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," MPRA Paper 13945, University Library of Munich, Germany.
  5. Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen &, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers 10/73, International Monetary Fund.
  6. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, vol. 37(2), pages 233-253.
  7. Philip R. Lane, 2013. "External imbalances and macroeconomic policy," New Zealand Economic Papers, Taylor & Francis Journals, vol. 47(1), pages 53-70, April.
  8. Werner Schule, 2010. "The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand," IMF Working Papers 10/128, International Monetary Fund.
  9. Freedman, Charles & Kumhof, Michael & Laxton, Douglas & Muir, Dirk & Mursula, Susanna, 2010. "Global effects of fiscal stimulus during the crisis," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 506-526, July.

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