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

Download or read book A Party Without a Hangover? On the Effects of U.S. Government Deficits written by Michael Kumhof and published by International Monetary Fund. This book was released on 2007-08 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.