Fiscal Policy, Consumption and Current Account in the European Countries
This paper explores the relationship between fiscal deficit, trade deficit and private consumption in European countries in the years 1970-2010. The aim of the study is to test empirically the validity and rationale of the Keynesian proposition (conventional view or Twin Deficits hypothesis) and the Ricardian Equivalence hypothesis, as well as to analyze the relationship between fiscal policy and private consumption. The empirical findings of our study show mixed results. In fact, static panel data estimates suggest that a one per cent increase in fiscal deficit/GDP ratio tends to deteriorate the current account/GDP ratio of 0.21 per cent, although it increases the private consumption of 0.21 per cent. Furthermore, the dynamic estimates largely depend on the estimator chosen, since the GMM-Dif estimates show a significant effect of fiscal deficit both on trade balance and on private consumption, in line with TD hypothesis; on the contrary, GMM-Sys estimator suggests that these effects are irrelevant, supporting RE hy-pothesis. With regard to the former estimates, we observed that each euro rise in fiscal deficit is associated, on average, with a 22 cents decline in the current account, while the estimated rise in private consumption is smaller (11 cents). Finally, Granger causality tests show mixed results.
Volume (Year): 32 (2012)
Issue (Month): 2 ()
|Contact details of provider:|| |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ashok Parikh & Bill Rao, 2006. "Do Fiscal Deficits Influence Current Accounts? A Case Study of India," Review of Development Economics, Wiley Blackwell, vol. 10(3), pages 492-505, 08.
- Carlos Fonseca Marinheiro, 2001.
"Ricardian Equivalence: an Empirical Application to the Portugese Economy,"
Center for Economic Studies - Discussion papers
ces0112, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Carlos Fonseca Marinheiro, . "Ricardian Equivalence: An Empirical Application to the Portuguese Economy," International Economics Working Papers Series ces0112, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
- Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
- Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
- repec:ebl:ecbull:v:5:y:2008:i:16:p:1-14 is not listed on IDEAS
- 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.
- António Afonso, 2008.
"Euler Testing Ricardo and Barro in the EUs,"
Working Papers Department of Economics
2008/23, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Rosenswieg, Jeffrey A & Tallman, Ellis W, 1993.
"Fiscal Policy and Trade Adjustment: Are the Deficits Really Twins?,"
Western Economic Association International, vol. 31(4), pages 580-94, October.
- Jeffrey A. Rosensweig & Ellis W. Tallman, 1991. "Fiscal policy and trade adjustment: are the deficits really twins?," Working Paper 91-2, Federal Reserve Bank of Atlanta.
- Arellano, Manuel & Bover, Olympia, 1995.
"Another look at the instrumental variable estimation of error-components models,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 29-51, July.
- M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
- Michel Normandin, 1994.
"Budget Deficit Persistence and the Twin Deficits Hypothesis,"
Cahiers de recherche CREFE / CREFE Working Papers
31, CREFE, Université du Québec à Montréal.
- Normandin, Michel, 1999. "Budget deficit persistence and the twin deficits hypothesis," Journal of International Economics, Elsevier, vol. 49(1), pages 171-193, October.
- Michel Normandin, 1996. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Macroeconomics 9607001, EconWPA.
- Nickel, Christiane & Vansteenkiste, Isabel, 2008. "Fiscal policies, the current account and Ricardian equivalence," Working Paper Series 0935, European Central Bank.
- Matthew Higgins & Thomas Klitgaard, 1998. "Viewing the current account deficit as a capital inflow," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Dec).
- 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.
- repec:ebl:ecbull:v:5:y:2004:i:16:p:1-10 is not listed on IDEAS
- Daly, Vince & Siddiki, Jalal Uddin, 2007.
"The twin deficits in OECD countries: cointegration analysis with regime shifts,"
Economics Discussion Papers
2007-5, School of Economics, Kingston University London.
- Vince Daly & Jalal Siddiki, 2009. "The twin deficits in OECD countries: cointegration analysis with regime shifts," Applied Economics Letters, Taylor & Francis Journals, vol. 16(11), pages 1155-1164.
- Gerhard Reitschuler & Jesús Crespo Cuaresma, 2004. "Ricardian Equivalence Revisited: Evidence from OECD countries," Economics Bulletin, AccessEcon, vol. 5(16), pages 1-10.
- Forte Francesco & Magazzino Cosimo, 2011. "Optimal Size Government and Economic Growth in EU Countries," Economia politica, Società editrice il Mulino, issue 3, pages 295-322.
- Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, 07.
- Aristovnik, Aleksander & Djurić, Sandra, 2010. "Twin deficits and the Feldstein-Horioka puzzle: a comparison of the EU member states and candidate countries," MPRA Paper 24149, University Library of Munich, Germany.
- Blundell, R. & Bond, S., 1995.
"Initial Conditions and Moment Restrictions in Dynamic Panel Data Models,"
104, Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- 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.
- Kostas Drakos, 2001. "Testing the Ricardian Equivalence Theorem: Time Series Evidence from Greece," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 149-160, June.
- Artatrana Ratha, 2010. "Twin Deficits or Distant Cousins? Evidence from India," Working Papers 2010-5 Classification- F , Saint Cloud State University, Department of Economics.
- Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
- Piersanti, Giovanni, 2000. "Current account dynamics and expected future budget deficits: some international evidence," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 255-271, April.
- Agustin Garcia & Julian Ramajo, 2004. "Budget deficit and interest rates: empirical evidence for Spain," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 715-718.
- Khalid, Ahmed M., 1996. "Ricardian equivalence: Empirical evidence from developing economies," Journal of Development Economics, Elsevier, vol. 51(2), pages 413-432, December.
When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-12-00048. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.