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

A Party without a Hangover? On the Effects of U.S. Government Deficits by Douglas Laxton
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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.
International Monetary Fund; August 2007
38 pages; ISBN 9781452739014
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Title: A Party without a Hangover? On the Effects of U.S. Government Deficits
Author: Douglas Laxton; Michael Kumhof