Budget Deficits and the Foreign Trade Balance: A Cross-Country Study
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.
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Volume (Year): 53 (2000)
Issue (Month): 1 ()
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