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Budget Deficits and the Foreign Trade Balance: A Cross-Country Study

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Abstract

The finite horizon neoclassical theory predicts that for a given path of government spending, an increase in the budget deficit will worsen the foreign trade balance. In contrast, the Ricardian view suggests that the higher budget deficit is met by an equal increase in the desired private saving. Thus, foreign trade balance remains unaffected. Using a cross-country data set for 67 countries, and an empirical model which addresses the important aspect of cross-country heterogeneity, this study finds support for the neoclassical view.

Suggested Citation

  • Mohammadi , Hassan, 2000. "Budget Deficits and the Foreign Trade Balance: A Cross-Country Study," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 53(1), pages 85-95.
  • Handle: RePEc:ris:ecoint:0257
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    3. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    4. Paul R Masson, 1998. "Contagion; Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
    5. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    6. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
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    Cited by:

    1. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.

    More about this item

    Keywords

    Neoclassical; Ricardian; Budget Deficits; Trade Deficits;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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