Fiscal Deficits and Current Account Deficits

IMF Working Papers, October 1, 2009

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Fiscal Deficits and Current Account Deficits

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Bibliographic details

• Authors: Michael Kumhof, Douglas Laxton
• Published: October 1, 2009
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451873849.001

Summary

• The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior.
• Under the same assumption, permanent fiscal deficits can have worrisome implications:
  • If they occur in large countries they significantly raise the world real interest rate.
  • They cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration.
  • 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.

Key Findings

• Short run response:
  • Current account deterioration ≈ "around 50 percent of the fiscal deficit deterioration."
• Longer run responses:
  • For a large economy (example: the United States): current account deterioration ≈ "almost 75 percent."
  • For a small open economy: current account deterioration ≈ "almost 100 percent."
• Global interest rate effects:
  • Permanent fiscal deficits in large countries "significantly raise the world real interest rate."

Analytical Context and Assumptions

• Core behavioral assumption: non-Ricardian savings behavior is required for significant fiscal stimulus effects and underlies the results on deficits and current accounts.
• Paper type: IMF Working Paper examining interactions among fiscal deficits, current account balances, and real interest rates under the stated behavioral assumption.

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