Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis
AbstractWe study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post-1975 period. Our structural approach is based on a tractable small open-economy model where a tax cut innovation generates a budget deficit. In turn, the budget deficit affects the external deficit by two distinct channels. The demographic channel works through the overlapping-generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate significant positive comovements between the budget and external deficits. We also find that both the demographic and forecasting channels are important to explain the comovements.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0832.
Date of creation: 2008
Date of revision:
Budget Deficit; External Deficit; Fiscal Policy; Overlapping Generations;
Other versions of this item:
- Martin Boileau & Michel Normandin, 2012. "Do tax cuts generate twin deficits? A multi-country analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 45(4), pages 1667-1699, November.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-21 (All new papers)
- NEP-CBA-2008-10-21 (Central Banking)
- NEP-DGE-2008-10-21 (Dynamic General Equilibrium)
- NEP-MAC-2008-10-21 (Macroeconomics)
- NEP-OPM-2008-10-21 (Open Economy Macroeconomics)
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