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

August 1, 2007

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Format: Chicago

Douglas Laxton, and Michael Kumhof. A Party without a Hangover? On the Effects of U.S. Government Deficits, (USA: International Monetary Fund, 2007) accessed December 3, 2024

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.

Subject: Consumption, Current account deficits, Fiscal policy, Public debt, Real interest rates

Keywords: Present discounted value, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/202
Stock No:

WPIEA2007202
ISBN:

9781451867664
ISSN:

1018-5941

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