1- Mr. Rato posits that by increasing taxes (T) the U.S. would see an improvement (decrease in the deficit) of the U.S. current account deficit. He makes this statement in light of the worsening deficit which jumped to $66.1bn last month. He strongly advocates raising taxes as a means of increasing government revenue to improve the current account. Mr. Rato presupposes that without such a drastic change in fiscal policy the U.S., and the world at large, will be confronted with higher interest rates, more expensive goods, and instability in global financial markets. He calls for similar measures for Asian and European markets stating that domestic governments need to be more proactive in order to correct problems affecting their respective current accounts. Mr. Rato calls for immediate domestic action. He argues that in the long run severe fissures in the U.S. economy will surface if the current account deficit is left unchecked. Mr. Rato does not believe that a decrease in government spending (G) alone will improve the current account. He underscores the fact that the Bush administration's pledge to halve the fiscal deficit has not come to fruition. Conversely, high defense spending and emergency aid have led to a deterioration of the fiscal deficit. Thus, according to Mr. Rato, an increase in taxes is what is needed.
2- Our Models:
Asset Market (AA Curve)
FX : i= i* + (E(s) ? S)/ S = ß ( S; i*, E(s))
Home Money Market: M/P = L (i; y, other)
Foreign Money Market: M*/P* = L (i*; y*, other*)
Goo ...