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Fiscal policy plays key role in rebalancing global demand: IMF

(Xinhua)

10:01, September 15, 2011

WASHINGTON, Sept. 14 (Xinhua) -- Fiscal policy has a crucial role to play in global demand rebalancing because it has a large and long-lasting effect on an economy's external balance, the International Monetary Fund (IMF) said on Wednesday.

"We find that cutting the budget deficit by 1 percent of gross domestic product (GDP) improves an economy's current account balance by over a half percent of GDP," the IMF said in a report released on Wednesday prior to its upcoming annual meetings.

The current account improves because imports decline with weaker domestic consumption and investment, and exports rise with the currency depreciation that tends to follow fiscal tightening, noted the analytic chapters of IMF's flagship World Economic Outlook (WEO) report.

When different economies tighten fiscal policies simultaneously, what matters for the current account is how much each economy consolidates relative to others. "The current pattern of fiscal adjustment plans will contribute to a narrowing of euro area imbalances and emerging Asian trade surpluses, but a widening of the U.S. current account deficit," noted the report.

The Washington-based IMF and its sister agency World Bank were scheduled to kick off their annual meetings in late September.

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