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econ122lec5slides (1) - Econ 122 Lecture 5: Fiscal Decits...

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Econ 122 Lecture 5: Fiscal De&cits and the Current Account Joel M. David UCLA August 11, 2010 Joel M. David (UCLA) August 11, 2010 1 / 19
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Introduction From the end of World War I through the early 1980&s, the US ran a CA surplus (believe it or not!) Since then, the US CA and NIIP have deteriorated dramatically, making the US the world&s largest debtor. There have been a number of alternative explanations for these large CA de±cits. We will focus on the role that has been ascribed to government policies in causing the switch from recurring surpluses to de±cits. Joel M. David (UCLA) August 11, 2010 2 / 19
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US CA and NIIP Joel M. David (UCLA) August 11, 2010 3 / 19
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Explanations for the Shift to CA De&cits 1 In the 1980s, foreign countries wanted to send their savings to the US, forcing the US to run CA de&cit (due to perception of US as "safe haven," international instability, and reduced &nancial regulation). 2 In the 1980s, the US wanted to save less and spend more for any level of the interest rate. Thus, US borrowing increased and the CA declined. Luckily, the two stories have opposite implications for the US interest rate. As the next graph shows, the &rst implies lower interest rates in the US as the supply of foreign lendings increases. The second implies a higher interest rate as the US demand for borrowing rises. Let the data tell us which is more likely. ..the US interest rate actually increased in the 1980s, supporting the second explanation. So we will focus on this one. Joel M. David (UCLA) August 11, 2010 4 / 19
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Explanations and Implications for the Interest Rate Joel M. David (UCLA) August 11, 2010 5 / 19
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The Role of the Government National savings S is the sum of private sector savings S p and government savings S g , i.e., S = S p + S g A large tax reform, which reduced tax revenues, along with an increase in military spending, caused a large &scal de&cit (decline in government savings) in the early 1980s. A fall in private savings followed. Did the decline in government savings shift the US savings schedule to the left, causing the deterioration in the CA? While the story is plausible, we will formally examine it in our framework and see that the model does not predict this behavior. .. Joel M. David (UCLA) August 11, 2010 6 / 19
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The Government Sector We return to the endowment economy that we have previously studied, i.e., we once again abstract from a production sector.
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econ122lec5slides (1) - Econ 122 Lecture 5: Fiscal Decits...

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