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Consolidation first - About twin deficits and the causal relation between fiscal budget and current account imbalances

Author

Listed:
  • Matthias Hartmann

    () (Alfred-Weber-Institute for Economics, University of Heidelberg)

  • Helmut Herwartz

    () (Department of Econonomics, University of Göttingen)

Abstract

During recent years, large trade- and budget deficits have accumulated especially in advanced economies. This study examines if this coincidence actually reflects a causal relation. Economic theory and previously documented findings on causality between trade and government balances are inconclusive. Summarizing evidence over a cross section of 19 advanced economies, we document that the budget balance influences the current account in a more pronounced way than vice versa. Moreover, the documented causal influence is characterized by a stronger tendency towards a twin deficit (or -surplus) rather than a twin divergence.

Suggested Citation

  • Matthias Hartmann & Helmut Herwartz, 2012. "Consolidation first - About twin deficits and the causal relation between fiscal budget and current account imbalances," Economics Bulletin, AccessEcon, vol. 32(4), pages 3313-3319.
    • Handle: RePEc:ebl:ecbull:eb-12-00823
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I4-P319.pdf
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    References listed on IDEAS

    as
    1. John Bluedorn & Daniel Leigh, 2011. "Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(4), pages 582-602, November.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
    4. 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.
    5. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    6. Alberto Bagnai, 2010. "Twin deficits in CEEC economies: evidence from panel unit root tests," Economics Bulletin, AccessEcon, vol. 30(2), pages 1071-1081.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fiscal policy; trade imbalances; Granger causality; forecasting;

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • F3 - International Economics - - International Finance

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