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Short-run analysis of fiscal policy and the current account in a finite horizon model

  • Zou, Heng-Fu

This paper utilizes a technique developed by Judd to quantify the short-run effects of fiscal policies and income shocks on the current account in a small open economy. It is found that: (1) a future increase in government spending improves the short-run current account; (2) a future tax increase worsens the short-run current account; (3) a present increase in the government spending worsens the short-run current account dollar by dollar, while a present increase in the income improves the current account dollar by dollar; (4) when government budget is balanced in the long run, a tax cut accompanied by an equal government spending cut in the future always leads to a deterioration in the short-run current account.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 16 (1994)
Issue (Month): 2 ()
Pages: 347-357

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Handle: RePEc:eee:jmacro:v:16:y:1994:i:2:p:347-357
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Judd, Kenneth, 1987. "Debt and distortionary taxation in a simple perfect foresight model," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 51-72, July.
  2. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
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