THE EFFECT OF GOVERNMENT SPENDING ON THE CURRENT ACCOUNT, OUTPUT, ANDEXPENDITURES - EVIDENCE FROM LATIN-AMERICA

This paper examines the linkages between government expenditures and c urrent account balances in several Latin American economies, over the period 1974-1984. In theory, these linkages critically depend on priva te sector responses to changes in government expenditures, on both the demand and supply sides. The analysis provides evidence that the nega tive current account - government expenditure linkage is much stronger in the event of a temporary shock to government expenditures than in the event of a permanent shock. The source of this differential respon se appears to be primarily on the expenditure side, suggesting that pr ivate sectors in Latin America incorporate the present discounted valu e (rather than simply the current value) of government expenditures in to their expenditure decisions.