Current-account targeting and the equilibrium approach to fiscal policy

Internal and external balance are the twins goals of traditional Keynesian macroeconomic policy. New classical economists question whether either of these are related to welfare, since employment fluctuations may be Pareto-efficient, while the current-account balance is perceived as the outcome of saving and investment decisions by intertemporally-optimising agents. The present paper shows, however, that the current-account effects and welfare effects of various types of fiscal policy are directly related within the New Classical model, so that the response of the current account can be used to elicit information about the optimality or otherwise of government spending. The equilibrium approach therefore provides a microfoundation for "external balance" as an intermediate target for fiscal spending.

A hard copy is available in UCD Library at GEN 330.08 IR/UNI