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On the relationship between the current account and the fiscal balance: The case of Canada

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  • Janko, Zuzana

Abstract

This paper uses an Autoregressive Distributed Lag model to examine the long run and short run relationship between the current account and the fiscal balance, as well as other determinants, using Canadian quarterly data from 1981 to 2018. The results indicate that there is a long-run cointegrating relationship between the current account and the fiscal balance, investment, and private credit. Moreover, the relationship between the current account and the fiscal balance is positive in the long-run, thus providing support for the Keynesian Hypothesis of the fiscal balance driving the current account. Specifically, a one percentage point rise in the fiscal balance to GDP ratio yields a 0.43 percentage point rise in the current account as a percent of GDP. This positive relationship is present in the short-run as well. Finally, the findings from the error correction model yield a speed of adjustment of 0.225, hence 22.5% of the long-run adjustment in the current account occurs next period.

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  • Janko, Zuzana, 2020. "On the relationship between the current account and the fiscal balance: The case of Canada," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301388
    DOI: 10.1016/j.najef.2020.101241
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    Cited by:

    1. Antonio Afonso & Jose Carlos Coelho, 2021. "Fiscal and current account imbalances: the cases of Germany and Portugal," Working Papers 2021.12, International Network for Economic Research - INFER.
    2. Maran Marimuthu & Hanana Khan & Romana Bangash, 2021. "Is the Fiscal Deficit of ASEAN Alarming? Evidence from Fiscal Deficit Consequences and Contribution towards Sustainable Economic Growth," Sustainability, MDPI, vol. 13(18), pages 1-19, September.
    3. António Afonso & José Carlos Coelho, 2023. "Twin deficits through the looking glass: time-varying analysis in the Euro area," Economic Change and Restructuring, Springer, vol. 56(4), pages 2087-2110, August.
    4. António Afonso & José Carlos Coelho, 2021. "Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: the EMU experience of Portugal," Working Papers REM 2021/0182, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    5. António Afonso & José Carlos Coelho, 2021. "60%, -4% And 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments," EconPol Working Paper 69, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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    More about this item

    Keywords

    Current account; Twin deficit; Time series ARDL modeling; Error-correction; Cointegration;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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