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Budget Deficits and the Foreign Trade Balance: A Cross-Country Study

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Abstract

The finite horizon neoclassical theory predicts that for a given path of government spending, an increase in the budget deficit will worsen the foreign trade balance. In contrast, the Ricardian view suggests that the higher budget deficit is met by an equal increase in the desired private saving. Thus, foreign trade balance remains unaffected. Using a cross-country data set for 67 countries, and an empirical model which addresses the important aspect of cross-country heterogeneity, this study finds support for the neoclassical view.

Suggested Citation

  • Mohammadi , Hassan, 2000. "Budget Deficits and the Foreign Trade Balance: A Cross-Country Study," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 53(1), pages 85-95.
    • Handle: RePEc:ris:ecoint:0257
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    Cited by:

    1. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    2. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.

    More about this item

    Keywords

    Neoclassical; Ricardian; Budget Deficits; Trade Deficits;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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