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

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  • Zou, Heng-Fu

Abstract

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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  • Zou, Heng-Fu, 1994. "Short-run analysis of fiscal policy and the current account in a finite horizon model," Journal of Macroeconomics, Elsevier, vol. 16(2), pages 347-357.
  • Handle: RePEc:eee:jmacro:v:16:y:1994:i:2:p:347-357
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    References listed on IDEAS

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    1. 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.
    2. 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.
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    Cited by:

    1. Ikeda, Shinsuke & Gombi, Ichiro, 1999. "Habits, costly investment, and current account dynamics," Journal of International Economics, Elsevier, vol. 49(2), pages 363-384, December.
    2. Chan Wang & Heng-fu Zou, 2013. "On the efficiency of monetary and fiscal policy in open economies," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 179-206, May.
    3. Xiaoyong Cui & Liutang Gong & Ziguan Zhuang, 2008. "Macroeconomic Policies and Foreign Asset Accumulation in a Finite-Horizon Model," Annals of Economics and Finance, Society for AEF, vol. 9(2), pages 293-313, November.
    4. Chan Wang & Heng-fu Zou, 2013. "Optimal monetary and tariff policy in open economies," CEMA Working Papers 587, China Economics and Management Academy, Central University of Finance and Economics.
    5. Chan Wang & Heng-fu Zou, 2013. "Optimal monetary policy in open economies: the role of reference currency in vertical production and trade," CEMA Working Papers 586, China Economics and Management Academy, Central University of Finance and Economics.

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