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Current account adjustments in OECD countries revisited: The role of the fiscal stance

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  • Theofilakou, Nancy
  • Stournaras, Yannis
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    Abstract

    This paper revisits the adjustment path of key economic and financial indicators during large current account adjustment episodes in OECD countries, after controlling for discretionary fiscal policy behavior. We find that the drivers of current account deficit reversals differ according to the fiscal policy stance. In economies with expansionary fiscal policies, external sector adjustment is driven by cyclical and credit factors. In economies implementing fiscal consolidation, adjustment is triggered by fiscal and financial factors, while the disruptive effects of the adjustment are smaller. We conclude that fiscally challenged economies facing external imbalances could ameliorate the adjustment path through fiscal consolidation policies.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 34 (2012)
    Issue (Month): 5 ()
    Pages: 719-734

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    Handle: RePEc:eee:jpolmo:v:34:y:2012:i:5:p:719-734

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    Web page: http://www.elsevier.com/locate/inca/505735

    Related research

    Keywords: Fiscal policy; Current account adjustment; Event study analysis; Multinomial discrete choice modeling;

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    Cited by:
    1. Trachanas, Emmanouil & Katrakilidis, Constantinos, 2013. "The dynamic linkages of fiscal and current account deficits: New evidence from five highly indebted European countries accounting for regime shifts and asymmetries," Economic Modelling, Elsevier, vol. 31(C), pages 502-510.

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