A Party without a Hangover? On the Effects of U.S. Government Deficits

 
Author/Editor: Kumhof, Michael ; Laxton, Douglas
 
Publication Date: August 01, 2007
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: This paper develops a 2-country New Keynesian overlapping generations model suitable for the joint evaluation of monetary and fiscal policies. We show that a permanent increase in U.S. government deficits raises the world real interest rate and significantly increases U.S. current account deficits, especially in the medium- to long-run. A simultaneous increase in non-U.S. savings lowers the world real interest rate and further increases U.S. current account deficits. We show that conventional infinite horizon models are ill-equipped to deal with issues that involve permanent changes in public or private sector savings rates.
 
Series: Working Paper No. 07/202
Subject(s): Budget deficits | United States | Working Paper | Taxes | Public debt | Economic models

Author's Keyword(s): Finite lives | distortionary taxes | government debt
 
English
Publication Date: August 01, 2007
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2007202 Pages: 38
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