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Current Account and Budget Deficits: Twins or Distant Cousins?

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  • Enders, Walter
  • Lee, Bong-Soo

Abstract

This paper develops a two-country micro-theoretic model consistent with the Ricardian equivalence hypothesis. Specifically, tax increases used to retire government debt will not affect private spending or the current account balance. However, increases in government spending, regardless of the means of finance, can be expected to induce a current account deficit. An unconstrained vector autoregression shows some patterns in the recent U.S. data that appear to be inconsistent with the Ricardian equivalence hypothesis. Rigorous testing of the model, however, does not allow the authors to reject the independence of the record federal government budget and current account deficits. Copyright 1990 by MIT Press.

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  • Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-381, August.
    • Handle: RePEc:tpr:restat:v:72:y:1990:i:3:p:373-81
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