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Fiscal Policy and the Current Account

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  • Ali Abbas, S.M.
  • Bouhga-Hagbe, Jacques
  • Fatás, Antonio
  • Mauro, Paolo
  • Velloso, Ricardo C.

Abstract

This paper examines the relationship between fiscal policy and the current account, drawing on a larger country sample than in previous studies and using panel regressions, vector auto-regressions, and an analysis of large fiscal and external adjustments. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2–0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7859.

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Date of creation: Jun 2010
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Handle: RePEc:cpr:ceprdp:7859

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Keywords: current account; exchange rate; external imbalances; fiscal policy;

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