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Budget Deficits and Current Account in Japan and the U.S.: An Empirical Evidence on the Twin Deficits Hypothesis

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  • Yoichi Matsubayashi

    ()
    (Graduate School of Economics, Kobe University)

Abstract

This paper theoretically examines the mechanism of the occurrence of gtwin deficitsh, which means that the budget balance influences the current account, and quantitatively analyzes the probability of the occurrence. Specifically, the author studies the cases of Japan and the U.S. to demonstrate that changes in liquidity constraint in households play an important role in the occurrence of twin deficits. The quantitative analysis indicates that Japan is likely to have had the mechanism where the deteriorating budget balance negatively influenced the current account in the 1990fs, but not as far as turning it into a deficit. On the other hand, in the U.S., the rapid expansion of the budget deficits since 2007 seems to have deteriorated the current account, which implies the occurrence of twin deficits.

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Bibliographic Info

Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 1010.

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Length: 22pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:koe:wpaper:1010

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Web page: http://www.econ.kobe-u.ac.jp
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Keywords: Current Account; Budget Deficits; Twin deficits; Liquidity Constraint;

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  1. António Afonso & Christophe Rault, 2009. "Budgetary and External Imbalances Relationship: A Panel Data Diagnostic," CESifo Working Paper Series 2559, CESifo Group Munich.
  2. Enders, Walter & Lee, Bong-Soo, 1990. "Current Account and Budget Deficits: Twins or Distant Cousins?," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 373-81, August.
  3. Jeffrey A. Rosensweig & Ellis W. Tallman, 1991. "Fiscal policy and trade adjustment: are the deficits really twins?," Working Paper, Federal Reserve Bank of Atlanta 91-2, Federal Reserve Bank of Atlanta.
  4. Gruber, Joseph W., 2004. "A present value test of habits and the current account," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(7), pages 1495-1507, October.
  5. Ogawa, Kazuo, 1990. "Cyclical variations in liquidity-constrained consumers: Evidence from macro data in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 4(2), pages 173-193, June.
  6. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(4), pages 414-435, October.
  7. Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 255-271, April.
  8. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(5), pages 895-916, October.
  9. Lori Leachman & Bill Francis, 2002. "Twin Deficits: Apparition or Reality?," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 34(9), pages 1121-1132.
  10. Matsubayashi, Yoichi, 2006. "Structural and cyclical movements of the current account in Japan: An alternative measure," Japan and the World Economy, Elsevier, Elsevier, vol. 18(4), pages 545-567, December.
  11. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 31, CREFE, Université du Québec à Montréal.
  12. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2004. "Current accounts dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series, European Central Bank 0311, European Central Bank.
  13. Michele Cavallo, 2005. "Understanding the twin deficits: new approaches, new results," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue jul22.
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