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Fiscal policy and trade adjustment: are the deficits really twins?

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Author Info

  • Jeffrey A. Rosensweig
  • Ellis W. Tallman

Abstract

Since the mid 1980s, an extensive empirical literature has examined the relationship between U.S. fiscal deficits, exchange rates, and trade balances. The authors investigate two questions that continue to spark debate: do increased government deficits cause dollar appreciation, and do fiscal deficits lead to higher trade deficits (the popular 'twin deficit'notion)? They examine these issues using a five-variable vector autoregressive system, generating posterior probability bounds to assess significance. The authors' results provide some evidence that growing government deficits appreciate the dollar and support the twin deficit notion that government deficits contribute to trade deficits. Copyright 1993 by Oxford University Press.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 91-2.

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Date of creation: 1991
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Handle: RePEc:fip:fedawp:91-2

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Keywords: Balance of trade ; Budget deficits ; Fiscal policy;

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Cited by:
  1. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government debt," Finance and Economics Discussion Series 1998-09, Board of Governors of the Federal Reserve System (U.S.).
    • Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
  2. Selahattin Dibooglu, 1995. "Accounting for U.S. Current Account Deficits: An Empirical Investigation," International Finance 9502003, EconWPA.
  3. Cosimo Magazzino, 2012. "Fiscal Policy, Consumption and Current Account in the European Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1330-1344.
  4. António Afonso & Christophe Rault, 2008. "Budgetary and external imbalances relationship - a panel data diagnostic," Working Paper Series 961, European Central Bank.
  5. Anoruo, Emmanuel & Ramchander, Sanjay, 1998. "Current account and fiscal deficits: Evidence from five developing economies of Asia," Journal of Asian Economics, Elsevier, vol. 9(3), pages 487-501.
  6. Owen F. Humpage, 1992. "An introduction to the international implications of U.S. fiscal policy," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 27-39.
  7. Herrmann, Sabine & Jochem, Axel, 2005. "Determinants of current account developments in the central and east European EU member states - consequences for the enlargement of the euro area," Discussion Paper Series 1: Economic Studies 2005,32, Deutsche Bundesbank, Research Centre.
  8. Elif Akbostanci & Gül Ipek Tunç, 2001. "Turkish Twin Effects: An Error Correction Model of Trade Balance," ERC Working Papers 0106, ERC - Economic Research Center, Middle East Technical University, revised Jun 2001.
  9. Selma Mahfouz & Richard Hemming & Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity-A Review of the Literature," IMF Working Papers 02/208, International Monetary Fund.
  10. Ketenci, Natalya & Uz, Idil, 2010. "Determinants of current account in the EU: the relation between internal and external balances in the new members," MPRA Paper 27466, University Library of Munich, Germany.
  11. E Lau & S Abu Mansor & C-H Puah, 2010. "Revival of the Twin Deficits in Asian Crisis-affected Countries," Economic Issues Journal Articles, Economic Issues, vol. 15(1), pages 29-54, March.
  12. Artatrana Ratha, 2010. "Twin Deficits or Distant Cousins? Evidence from India," Working Papers 2010-5 Classification- F , Saint Cloud State University, Department of Economics.
  13. Giugale, Marcelo & Korobow, Adam, 2000. "Shock persistence and the choice of foreign exchange regime - an empirical note from Mexico," Policy Research Working Paper Series 2371, The World Bank.
  14. Puah, Chin-Hong & Lau, Evan & Tan, Kim Lee, 2006. "Budget-current account deficits nexus in Malaysia," MPRA Paper 37677, University Library of Munich, Germany.

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