Fiscal Policy and the External Deficit: Siblings, but not Twins
This paper first surveys a number of partial and macroeconomic approaches to the determination of the current account, and then summarizes the evidence from multicountry economic models about the linkages between U.S. government spending and the U.S. current account during the 1 980s. The available evidence from a large number of multicountry models suggests that the U.S. fiscal policy of the first half of the 1980s was responsible for about half of the buildup in the external deficit, and that the accumulated net foreign debt is about 500 billion dollars higher than it would have been without the fiscal expansion.
Published: "The Fiscal Deficit and the External Deficit: Siblings But Not Twins." From The Great Fiscal Experiment, edited by Rudolph G. Penner, pp. 23-58. Washington, DC: The Urban Institute Press, 1991.