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

  • Heng-fu Zou

    (The World Bank)

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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File URL: http://down.aefweb.net/WorkingPapers/w95.pdf
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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 95.

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Length: 11 pages
Date of creation: 1995
Date of revision:
Publication status: Published in Journal of Macroeconomics, Volume 16, Issue 2, Spring 1994, Pages 347-357
Handle: RePEc:cuf:wpaper:95
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Turnovsky, S. & Sen, P., 1988. "Deterioration Of The Term Of Trade And Capital Eccumulation A Reexamination Of The Laursen-Metzler Effect," Working Papers 88-08, University of Washington, Department of Economics.
  2. 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.
  3. 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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