Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis

CIRPEE Working Paper 08-32

39 Pages Posted: 20 Oct 2008

See all articles by Martin Boileau

Martin Boileau

University of Colorado at Boulder - Department of Economics

Michel Normandin

HEC Montreal - Institute of Applied Economics

Date Written: October 16, 2008

Abstract

We study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post-1975 period. Our structural approach is based on a tractable small open-economy model where a tax cut innovation generates a budget deficit. In turn, the budget deficit affects the external deficit by two distinct channels. The demographic channel works through the overlapping-generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate significant positive comovements between the budget and external deficits. We also find that both the demographic and forecasting channels are important to explain the comovements.

Keywords: Budget Deficit, External Deficit, Fiscal Policy, Overlapping Generations

JEL Classification: E62, F32, F41

Suggested Citation

Boileau, Martin and Normandin, Michel, Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis (October 16, 2008). CIRPEE Working Paper 08-32, Available at SSRN: https://ssrn.com/abstract=1285518 or http://dx.doi.org/10.2139/ssrn.1285518

Martin Boileau

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
(303) 492-2108 (Phone)
(303) 492-8960 (Fax)

Michel Normandin (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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