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Budget deficits and the current account balance: New evidence from panel data

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  • Hassan Mohammadi

Abstract

This study examines two distinguishing predictions of the finite-horizon open-economy macroeconomic models regarding the effect of fiscal policy on the current account balance: (1) Given the path of government expenditures, a fall in public savings has an adverse effect on the current account balance, and (2) a bond-financed increase in government expenditures exerts a larger adverse effect on the current account balance than a tax-financed alternative. These predictions are vastly different from those of the Ricardian theory. According to this view, (1) lower public savings are met by equal increases in desired private savings, and thus the current account balance does not change, and (2) the response of current account balance to a change in government spending is independent of its financing methods. Empirical analysis of 63 countries is consistent with the conventional theory. Copyright Academy of Economics and Finance 2004

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  • Hassan Mohammadi, 2004. "Budget deficits and the current account balance: New evidence from panel data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 28(1), pages 39-45, March.
    • Handle: RePEc:spr:jecfin:v:28:y:2004:i:1:p:39-45
    DOI: 10.1007/BF02761453
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    Cited by:

    1. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 2010/121, International Monetary Fund.
    2. Hany Eldemerdash & Hugh Metcalf & Sara Maioli, 2014. "Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective," Empirical Economics, Springer, vol. 47(3), pages 825-851, November.
    3. Hassan Mohammadi & Golaleh Moshrefi, 2012. "Fiscal policy and the current account new evidence from four East Asian countries," Applied Economics Letters, Taylor & Francis Journals, vol. 19(2), pages 167-173, February.
    4. Attiya Y. Javid & Muhammad Javid & Umiama Arif, 2010. "Fiscal Policy and Current Account Dynamics in the Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 577-592.
    5. Olusegun Ayodele Akanbi & Rashid Sbia, 2018. "Investigating the twin-deficit phenomenon among oil-exporting countries: Does oil really matter?," Empirical Economics, Springer, vol. 55(3), pages 1045-1064, November.
    6. Meliha ENER & Feyza ARICA, 2012. "The current account-interest rate relation: A panel data study for OECD countries," E3 Journal of Business Management and Economics., E3 Journals, vol. 3(2), pages 048-054.
    7. Mark Holmes, 2006. "To what extent are public savings offset by private savings in the OECD?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(3), pages 285-296, September.
    8. Eregha, Perekunah B. & Aworinde, Olalekan B. & Vo, Xuan Vinh, 2022. "Modeling twin deficit hypothesis with oil price volatility in African oil-producing countries," Resources Policy, Elsevier, vol. 75(C).
    9. Mirdala, Rajmund, 2013. "Fiscal Imbalances and Current Account Adjustments in the European Transition Economies," MPRA Paper 50362, University Library of Munich, Germany.
    10. S M Ali Abbas & Jacques Bouhga-Hagbe & Antonio Fatás & Paolo Mauro & Ricardo C Velloso, 2011. "Fiscal Policy and the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 603-629, November.
    11. Cosimo Magazzino, 2012. "Fiscal Policy, Consumption and Current Account in the European Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1330-1344.
    12. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    13. Chen, David Y., 2007. "Effects of monetary policy on the twin deficits," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(2), pages 279-292, May.
    14. Olusegun Akanbi, 2015. "Fiscal policy and current account in an oil-rich economy: the case of Nigeria," Empirical Economics, Springer, vol. 48(4), pages 1563-1585, June.
    15. El-Baz, Osama, 2014. "Empirical Investigation of the Twin Deficits Hypothesis: The Egyptian Case (1990-2012)," MPRA Paper 53428, University Library of Munich, Germany.
    16. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    17. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2014. "Mehr Vertrauen in Marktprozesse. Jahresgutachten 2014/15 [More confidence in market processes. Annual Report 2014/15]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201415.
    18. Mr. Yehenew Endegnanew & Ms. Therese Turner-Jones & Charles Amo Yartey, 2012. "Fiscal Policy and the Current Account: Are Microstates Different?," IMF Working Papers 2012/051, International Monetary Fund.
    19. Ahmad Zubaidi Baharumshah & Evan Lau, 2009. "Structural breaks and the twin deficits hypothesis: Evidence from East Asian countries," Economics Bulletin, AccessEcon, vol. 29(4), pages 2517-2524.
    20. Helena Glebocki Keefe & Ralf Hepp, 2024. "The effects of European fiscal discipline measures on current account balances," International Economics and Economic Policy, Springer, vol. 21(1), pages 251-283, February.
    21. António Afonso & Philemon Kwame Opoku, 2018. "The Relationship between Fiscal and Current Account Imbalances in OECD Economies," Working Papers REM 2018/61, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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