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Fiscal deficits and current account deficits

  • Kumhof, Michael
  • Laxton, Douglas

Recent fiscal stimulus packages depend for their effectiveness on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, higher fiscal deficits can have problematic 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% of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75% for a large economy such as the United States, and almost 100% for a small open economy.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 10 ()
Pages: 2062-2082

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:10:p:2062-2082
DOI: 10.1016/j.jedc.2013.05.001
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