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Fiscal Deficits and Current Account Deficits

Author/Editor: Kumhof, Michael | Laxton, Douglas
Authorized for Distribution: October 1, 2009
Electronic Access: Free Full Text (PDF file size is 1,032KB)
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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: The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and almost 100 percent for a small open economy.
 
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Series: Working Paper No. 09/237
Subject(s): Budget deficits | Business cycles | Current account deficits | Economic models | Fiscal policy | Fiscal sustainability | Gross domestic product | Monetary policy | Private sector | Public debt | Savings
Author's keyword(s): Non-Ricardian Households; Government Deficits; Government Debt; Global Current Account Imbalances.
 
English  
    Published:   October 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009237   Pages:   35
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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