The current account and the optimal government debt

In this paper we analyze the optimal response of the current account and the government debt to real disturbances, permanent and temporary. Lumpsum taxes are not feasible and the government income is raised according to the Ramsey rule for optimum taxation. We show that permanent disturbances have no effects on either the private or the government current account if initially there are no deficits. Starting off from the same initial situation both the private sector and the government develop a deficit on current account in response to a temporary disturbance.