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Fiscal Policy, Consumption and Current Account in the European Countries

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  • Cosimo Magazzino

    ()
    (Roma Tre University)

Abstract

This paper explores the relationship between fiscal deficit, trade deficit and private consumption in European countries in the years 1970-2010. The aim of the study is to test empirically the validity and rationale of the Keynesian proposition (conventional view or Twin Deficits hypothesis) and the Ricardian Equivalence hypothesis, as well as to analyze the relationship between fiscal policy and private consumption. The empirical findings of our study show mixed results. In fact, static panel data estimates suggest that a one per cent increase in fiscal deficit/GDP ratio tends to deteriorate the current account/GDP ratio of 0.21 per cent, although it increases the private consumption of 0.21 per cent. Furthermore, the dynamic estimates largely depend on the estimator chosen, since the GMM-Dif estimates show a significant effect of fiscal deficit both on trade balance and on private consumption, in line with TD hypothesis; on the contrary, GMM-Sys estimator suggests that these effects are irrelevant, supporting RE hy-pothesis. With regard to the former estimates, we observed that each euro rise in fiscal deficit is associated, on average, with a 22 cents decline in the current account, while the estimated rise in private consumption is smaller (11 cents). Finally, Granger causality tests show mixed results.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 2 ()
Pages: 1330-1344

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Handle: RePEc:ebl:ecbull:eb-12-00048

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Keywords: Fiscal Policy; Ricardian Equivalence; Twin Deficits; Panel;

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References

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Cited by:
  1. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer, Springer, vol. 19(3), pages 289-310, August.
  2. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, Elsevier, vol. 37(2), pages 233-253.

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