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Fiscal Policy, Consumption and Current Account in the European Countries

Author

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  • Cosimo Magazzino

    () (Roma Tre University)

Abstract

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.

Suggested Citation

  • Cosimo Magazzino, 2012. "Fiscal Policy, Consumption and Current Account in the European Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1330-1344.
  • Handle: RePEc:ebl:ecbull:eb-12-00048
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Algieri, Bernardina, 2013. "An empirical analysis of the nexus between external balance and government budget balance: The case of the GIIPS countries," Economic Systems, Elsevier, vol. 37(2), pages 233-253.
    2. Francesco Forte & Cosimo Magazzino, 2013. "Twin Deficits in the European Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(3), pages 289-310, August.
    3. Ekkehart Schlicht, 2013. "Unexpected Consequences of Ricardian Expectations," Metroeconomica, Wiley Blackwell, vol. 64(3), pages 498-512, July.
    4. Mumtaz, Kinza & Munir, Kashif, 2016. "Dynamics of Twin Deficits in South Asian Countries," MPRA Paper 74592, University Library of Munich, Germany.
    5. repec:kap:iaecre:v:19:y:2013:i:3:p:289-310 is not listed on IDEAS
    6. Bernardin Senadza & Godson Korbla Aloryito, 2016. "The twin deficits hypothesis: Evidence from Ghana," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 9(3), pages 55-62, December.

    More about this item

    Keywords

    Fiscal Policy; Ricardian Equivalence; Twin Deficits; Panel;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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