PPT Twin Deficits PowerPoint presentation
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CA deficit and budget deficit closely linked savings = private government saving. US 1980’s deficit caused by increase in budget deficit CA account deficit. PowerPoint PPT presentation
Title: Twin Deficits
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
variables involved which could change
independently.
government expenditure, generating a big
government deficit and also a current account
deficit argument that they are Twin deficits
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- Twin deficits
- - government and current account deficits
- - the story does not always hold changes in
private saving and investment behavior
budget deficits prior the launch of Euro.
January 1999 (limit on deficit to enter the
Union).
account surplus
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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 inverse governments which lower their
deficits, induce private sector to lower its
saving)
hold (only half of the decline in Europe is due
to this theory.
Europe in 1990s increase household wealth
lowering private savings
jointly determined variables.
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- Running a CA deficit is irresponsible?
- True
- behind many countries economic problems Mexico
devaluation Dec 1994 (unsustainable CA deficit),
Hungary and Thailand (investors fearful to fund
such deficits)
Americas CA deficit
the country must be matched by foreign
borrowing or investment
goods
services (transport and banking), interest or
dividend payments to foreign investors, official
transfers, etc)
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- ! So even if a country borrowed in the past and
has a trade surplus can have a CA deficit due
to the interest payments on its past debts (CA
deficit a country is more indebted to the
foreigners)
rates can reduce a current account deficit
(saving increases and investment falls)
countries will run deficits or surpluses (closed
economy). In practice CA deficit 113 bill due
to the statistical inaccuracy)
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- Fear of CA deficits?
- Bretton Woods fixed the exchange rates and
imposed capital control hard to borrow. CA
deficit balance of payments crises
deficits for years
- lack of investment at home decrease in
domestic growth
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- Run sizeable deficits? -
- 1. makes sense for poor countries import
capital (investment from abroad)- South Korea 5
deficit
borrowers or savers at different times
deficits as they invest
surplus but still CA deficit due to the
interest on the debt
the income from investments but remains a
creditor
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- US
- Confirms this view
- 19th century borrowed CA deficit
- 1870 trade surplus
- 1900 CA surplus
- First half of 20th century worlds biggest net
creditor
from investment abroad
debtor again
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- Many countries have not followed this pattern
- Australia, Canada remained net debtors (still
able to finance this deficit, so OK!)
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- Why sizeable deficits?
- 2. Respond to temporary shocks drop in prices
of exports products in a country allow CA
deficit to raise, if temporary and reduce its
consumption if permanent.
permanent one.
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- Blame the budget?
- Why CA deficit
- - Decline in savings (investment constant)
worrying borrowed money finance consumption
rather than investment
