Twin Deficits11 - Twin Deficits Case Study: The US current...

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Twin Deficits
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Case Study: The US current account deficit What causes it and should we worry? Why is this important? There is a link between government deficit and the CA . But the link is not direct – there are other variables involved which could change independently. During 1980’s US cut taxes and raised same government expenditure, generating a big government deficit and also a current account deficit – argument that they are Twin deficits Sp - Def - I = CA
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Twin deficits: - government and current account deficits - the story does not always hold : changes in private saving and investment behavior Ex: European countries cut their government budget deficits prior the launch of Euro , January 1999 (limit on deficit to enter the Union). Twin deficits theory – increase in current account surplus In reality – nothing happened because: - fall in the private saving rate - slight increase in investment
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Possible explanations: “Ricardian Equivalence” – when the government cuts taxes and raises its deficit, consumers anticipate that they will higher taxes later to pay off the deficit. In anticipation they raise their saving to offset the fall in government saving (or
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This note was uploaded on 04/14/2010 for the course ECON 351 taught by Professor Prodan during the Spring '10 term at University of Alabama - Huntsville.

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Twin Deficits11 - Twin Deficits Case Study: The US current...

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