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

Douglas Laxton and Michael Kumhof

No 2007/202, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; present discounted value (search for similar items in EconPapers)
Pages: 38
Date: 2007-08-01
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Citations: View citations in EconPapers (47)

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