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Current-account targeting and the equilibrium approach to fiscal policy

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  • Frank Barry

Abstract

Internal and external balance are the twins goals of traditional Keynesian macroeconomic policy. New classical economists question whether either of these are related to welfare, since employment fluctuations may be Pareto-efficient, while the current-account balance is perceived as the outcome of saving and investment decisions by intertemporally-optimising agents. The present paper shows, however, that the current-account effects and welfare effects of various types of fiscal policy are directly related within the New Classical model, so that the response of the current account can be used to elicit information about the optimality or otherwise of government spending. The equilibrium approach therefore provides a microfoundation for "external balance" as an intermediate target for fiscal spending.

Suggested Citation

  • Frank Barry, 1992. "Current-account targeting and the equilibrium approach to fiscal policy," Working Papers 199208, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:199208
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    File URL: http://hdl.handle.net/10197/1679
    File Function: First version, 1992
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