Re-examining the “twin deficits” hypothesis: evidence from Australia
AbstractThis paper re-examines the relationship between fiscal imbalances and net foreign borrowing. A general analytical approach is first developed which suggests that, other things equal, a rise (fall) in any advanced economy’s fiscal deficit should be fully matched by a rise (fall) in its net foreign borrowing, in accordance with the so-called twin deficits hypothesis. In the case of Australia, one of the world’s largest foreign borrower economies for its size, empirical estimation yields the novel result that Australia’s consolidated budget imbalance and its foreign borrowing were approximately twinned on the basis of quarterly data for 1983–2009, when Australia’s exchange rate floated and international capital mobility was high. This result is consistent with the conceptual framework and suggests that fiscal policy is likely to be ineffective as an instrument for influencing the real economy. Copyright Springer-Verlag 2013
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Bibliographic InfoArticle provided by Springer in its journal Empirical Economics.
Volume (Year): 45 (2013)
Issue (Month): 2 (October)
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Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
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