Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis

Martin Boileau and Michel Normandin ()

Cahiers de recherche from CIRPEE

Abstract: We study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post-1975 period. Our structural approach is based on a tractable small open-economy model where a tax cut innovation generates a budget deficit. In turn, the budget deficit affects the external deficit by two distinct channels. The demographic channel works through the overlapping-generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate significant positive comovements between the budget and external deficits. We also find that both the demographic and forecasting channels are important to explain the comovements.

Keywords: Budget Deficit; External Deficit; Fiscal Policy; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: E62 F32 F41 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Do tax cuts generate twin deficits? A multi-country analysis (2012)
Journal Article: Do tax cuts generate twin deficits? A multi‐country analysis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0832

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