Current-Account Effects of a Temporary Change in Government Expenditure

This paper employs a perfect-foresight model of intertemporal utility maximization in analysing the current-account effects of a temporary increase in government spending. The relationship between the marginal utility of private consumption and the supply of public goods in the economy plays a critical role in determining the qualitative nature of the optimal current-account response. The link between the timing of the policy change and the magnitude of the current-account effect is also examined.