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Finite horizons and the twin deficits

  • Kenneth Kasa

This paper uses Blanchard's (1985) model to study the relationship between budget deficits and trade deficits. The model is applied to annual post-war data from the U.S., Japan, and Germany. I find that in all three countries there is a significant link between trade deficits and budget deficits, holding constant expected changes in GNP and government expenditure. However, the implied planning horizons are quite different across countries. In particular, the implied planning horizon in the U.S. is only about 3 to 4 years, whereas in Japan it is 71 years and in Germany it is 31 years.

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File URL: http://www.frbsf.org/publications/economics/review/1994/94-3_19-28.pdf
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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1994)
Issue (Month): ()
Pages: 19-28

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Handle: RePEc:fip:fedfer:y:1994:p:19-28:n:3
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  1. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  2. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
  3. Leonardo Leiderman & Assaf Razin, 1987. "Testing Ricardian Neutrality with an Intertemporal Stochastic Model," NBER Working Papers 2258, National Bureau of Economic Research, Inc.
  4. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Testing an optimizing model of the current account via the consumption function," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 220-233, June.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  7. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  8. Poterba, James M. & Summers, Lawrence H., 1987. "Finite lifetimes and the effects of budget deficits on national saving," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 369-391, September.
  9. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  10. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
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