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The Impacts of the United States Fiscal Deficit Reduction to the World Economy

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  • Mansur, Alfan

Abstract

Since 1970s the US government has run considerable increasing budget deficits in general with the peak in 2009, just after global financial crisis in 2008. Using a small G-cubed model, this paper assesses the impact of the US fiscal deficit reduction to the World Economy. The results show that a permanent rapid shock in the US economy is less contractionary to the US economy and leads to more expansionary stimulus to the rest of the world in the short run. Under the phased US budget cuts, the US economy runs into higher adjustment costs of asset prices, so the economy worsens more in the medium run. Under the global scenario where the US deficits cut is followed by the rest of the world, the demand shocks are positively transmitted to the rest of the world. In order to gain the sustainable growth of the world economy in the long run, the global scenario is the best option because there will be enough incentives brought on the economies through forward looking responses.

Suggested Citation

  • Mansur, Alfan, 2014. "The Impacts of the United States Fiscal Deficit Reduction to the World Economy," MPRA Paper 93967, University Library of Munich, Germany, revised 20 Sep 2014.
    • Handle: RePEc:pra:mprapa:93967
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    References listed on IDEAS

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    1. Warwick J. McKibbin & Andrew B. Stoeckel & YingYing Lu, 2014. "Global Fiscal Adjustment and Trade Rebalancing," The World Economy, Wiley Blackwell, vol. 37(7), pages 892-922, July.
    2. Hughes Hallett,Andrew & Hutchison,Michael M. & Hougaard Jensen,Svend E. (ed.), 1999. "Fiscal Aspects of European Monetary Integration," Cambridge Books, Cambridge University Press, number 9780521651622.
    3. Warwick J. McKibbin & Andrew B. Stoeckel, 2012. "Global Fiscal Consolidation," Asian Economic Papers, MIT Press, vol. 11(1), pages 124-146, Winter/Sp.
    4. McKibbin, Warwick J. & Wilcoxen, Peter J., 2013. "A Global Approach to Energy and the Environment," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 995-1068, Elsevier.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    fiscal; deficits; shocks; global;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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