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Fiscal Policy and Current Account Dynamics in Case of Pakistan

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  • Javid, Attiya Y.
  • Javid, Muhammad
  • Arif, Umaima

Abstract

The study empirically investigates the effects of fiscal policy or government budget deficit shocks on the current account and the other macroeconomic variable: real output, real interest rate and exchange rate for Pakistan over the period 1960-2009. The structural Vector Autoregressive model is employed; the exogenous fiscal policy shocks are identified after controlling the business cycle effects on fiscal balances. The results suggest that an expansionary fiscal policy shock improves the current account and depreciates the exchange rate. The rise in private saving and the fall in investment contribute to the current account improvement while the exchange rate depreciation. The twin divergence of fiscal deficit and current account deficit is also explained by the output shock which seems to drive the current account movements and its comovements with the fiscal balance.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34858.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:34858

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Keywords: Restricted Vector Autoregressive model; current account; government budget deficit; fiscal policy; exchange rate;

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  1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  2. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
  3. Stephen M. Miller & Frank S. Russek, 1989. "Are The Twin Deficits Really Related?," Contemporary Economic Policy, Western Economic Association International, vol. 7(4), pages 91-115, October.
  4. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  5. Anjum Aqeel & Mohammed Nishat, 2000. "The Twin Deficits Phenomenon: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 535-550.
  6. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  7. International Monetary Fund, 2010. "Fiscal Policy and the Current Account," IMF Working Papers 10/121, International Monetary Fund.
  8. Giancarlo Corsetti & Gernot J. Müller, 2005. "Twin Deficits: Squaring Theory, Evidence and Common Sense," Economics Working Papers ECO2005/22, European University Institute.
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Cited by:
  1. Mirdala, Rajmund, 2013. "Fiscal Imbalances and Current Account Adjustments in the European Transition Economies," MPRA Paper 50362, University Library of Munich, Germany.

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