## Fiscal Deficits and Current Account Deficits

_IMF Working Papers, October 1, 2009_

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**Canonical URL:** [Fiscal Deficits and Current Account Deficits](https://www.imf.org/en/publications/wp/issues/2016/12/31/fiscal-deficits-and-current-account-deficits-23367)

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/fiscal-deficits-and-current-account-deficits-23367_