SHORT-RUN ANALYSIS OF FISCAL-POLICY AND THE CURRENT ACCOUNT IN A FINITE-HORIZON MODEL

This paper utilizes a technique developed by Judd to quantify the shor t-run effects of fiscal policies and income shocks on the current acco unt in a small open economy. It is found that: (1) a future increase i n government spending improves the short-run current account; (2) a fu ture tax increase worsens the short-run current account; (3) a present increase in the government spending worsens the short-run current acc ount dollar by dollar, while a present increase in the income improves the current account dollar by dollar, (4) when government budget is b alanced in the long run, a tax cut accompanied by an equal government spending cut in the future always leads to a deterioration in the shor t-run current account.