Fiscal Deficits and Current Account Deficits

Author/Editor:

Michael Kumhof ; Douglas Laxton

Publication Date:

October 1, 2009

Electronic Access:

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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.

Series:

Working Paper No. 2009/237

Subject:

Current account Current account deficits Government debt management Public debt Real interest rates

English

Publication Date:

October 1, 2009

ISBN/ISSN:

9781451873849/1018-5941

Stock No:

WPIEA2009237

Pages:

35

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