The Impacts of the United States Fiscal Deficit Reduction to the World Economy

Alfan Mansur

MPRA Paper from University Library of Munich, Germany

Abstract: Since 1970s the US government has run considerable increasing budget deficits in general with the peak in 2009, just after global financial crisis in 2008. Using a small G-cubed model, this paper assesses the impact of the US fiscal deficit reduction to the World Economy. The results show that a permanent rapid shock in the US economy is less contractionary to the US economy and leads to more expansionary stimulus to the rest of the world in the short run. Under the phased US budget cuts, the US economy runs into higher adjustment costs of asset prices, so the economy worsens more in the medium run. Under the global scenario where the US deficits cut is followed by the rest of the world, the demand shocks are positively transmitted to the rest of the world. In order to gain the sustainable growth of the world economy in the long run, the global scenario is the best option because there will be enough incentives brought on the economies through forward looking responses.

Keywords: fiscal; deficits; shocks; global (search for similar items in EconPapers)
JEL-codes: C50 D58 E27 E37 F40 (search for similar items in EconPapers)
Date: 2014-09-20, Revised 2014-09-20
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