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External and budget deficits in some developing countries

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  • Chihi, Foued
  • Normandin, Michel

Abstract

This paper documents and explains the positive comovement between the external and budget deficits of developing countries for which post-1960 time-series data are available. First, the estimates indicate that the empirical covariance between these deficits is always positive and is statistically significant for many cases. Second, the empirical covariance is close to that predicted from a tractable small open-economy, overlapping-generation model with heterogeneous goods capturing the joint behavior of the external and budget deficits. Also, the predicted covariance is induced by shocks which are closely related to internal conditions such as domestic resources and fiscal policies, and to a much lesser extent to external conditions such as the world interest rate, real exchange rate, and terms of trade.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 77-98

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:77-98

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Covariance decomposition; Vector autoregression; Small open-economy; Overlapping generations; Heterogeneous goods;

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Cited by:
  1. Veronika Å uliková & Marianna SiniÄáková & Denis Horváth, 2014. "Twin Deficits in Small Open Baltic Economies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 227-239, March.

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