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Fiscal Policies, External Deficits, and Budget Deficits

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  • Michel Normandin

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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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0632.

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Date of creation: 2006
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Handle: RePEc:lvl:lacicr:0632

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Keywords: Agents' Superior Information; Birth Rate; Impact and Dynamic Responses; G7 Countries; Orthogonality Restrictions;

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  8. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal.
  9. Boileau, Martin & Normandin, Michel, 2002. "Aggregate employment, real business cycles, and superior information," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 495-520, April.
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Cited by:
  1. Foued Chihi & Michel Normandin, 2008. "External and Budget Deficits in Developing Countries," Cahiers de recherche 0819, CIRPEE.
  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.

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