Expected Future Budget Deficits,the Real Exchange Rate and Current Account Dynamics in a Finite Horizon Model |
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| Authors: | Giovanni Piersanti |
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| Affiliation: | (1) University of Teramo, Department of Economic Methods, Loc. Coste S. Agostino, I-64100 Teramo, Italy, and University of Rome “Tor Vergata,” Department of Financial Economics and Quantitative Methods, Via di Tor Vergata, I-00133 Rome, Italy (e-mail: Piersanti@met.spol.unite.it), IT |
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| Abstract: | This paper uses an optimizing open economy general-equilibrium model to investigate the macroeconomic effects of current and expected future budget deficits. It is shown that current and expected future budget deficits are positively correlated with the current account deficit, the capital stock and the real exchange rate, but negatively correlated with the domestic real interest rate and consumption, along the stable path approaching the steady state. The paper also demonstrates that the world real interest rate is positively correlated with consumption, foreign assets and the domestic real interest rate, but negatively correlated with the capital stock and the real exchange rate. Received April 11, 2001; revised version received October 25, 2001 |
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| Keywords: | : optimizing models, budget deficits, real exchange rate, current account balance, transitional dynamics, saddle point equilibrium path, steady state. |
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