The effect of government spending on the current account, output, and expenditures: Evidence from latin America

Abstract

This paper examines the linkages between government expenditures and current account balances in several Latin American economies, over the period 1974–1984. In theory, these linkages critically depend on private sector responses to changes in government expenditures, on both the demand and supply sides. The analysis provides evidence that the negative 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 response appears to be primarily on the expenditure side, suggesting that private sectors in Latin America incorporate the present discounted value (rather than simply the current value) of government expenditures into their expenditure decisions.