This paper gauges the causal relationship between external and budget deficits by using Blanchard's overlapping generations model. This model tests the twin deficits hypothesis (i.e., there is a positive relationship between the deficits) and the Ricardian equivalence hypothesis (i.e., there is...

Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the "usual suspects" of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We confirm these...

For post-1975 Canadian data, we document the joint behavior of output, the current account, and the interest differential at the business cycle frequency. We also interpret the joint behavior using a simple small open economy model. Our simple model assumes that agents have access to world...