US economic growth turned negative in 2001 following the stock market reversal and the terrorism attacks of September 11. Fiscal policy was shifted through tax cuts, tax reforms, and direct cash payments to individual taxpayers. Some of the important tax reforms were set to expire and revert to their previous form by 2011. This paper will examine those tax policy changes and suggest policy alternatives.
This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper examines the relationship between fiscal policy and the current account, drawing on a larger country sample than in previous studies and using panel regressions, vector autoregressions, and an analysis of large fiscal and external adjustments. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2–0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential.