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External and budget deficits in some developing countries

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  • Chihi, Foued
  • Normandin, Michel

Abstract

This paper documents and explains the positive comovement between the external and budget deficits of developing countries for which post-1960 time-series data are available. First, the estimates indicate that the empirical covariance between these deficits is always positive and is statistically significant for many cases. Second, the empirical covariance is close to that predicted from a tractable small open-economy, overlapping-generation model with heterogeneous goods capturing the joint behavior of the external and budget deficits. Also, the predicted covariance is induced by shocks which are closely related to internal conditions such as domestic resources and fiscal policies, and to a much lesser extent to external conditions such as the world interest rate, real exchange rate, and terms of trade.

Suggested Citation

  • Chihi, Foued & Normandin, Michel, 2013. "External and budget deficits in some developing countries," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 77-98.
  • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:77-98
    DOI: 10.1016/j.jimonfin.2012.03.002
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    References listed on IDEAS

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    Cited by:

    1. Wong Hock Tsen, 2014. "External Balance And Budget In Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(2), pages 37-54.
    2. Veronika Å uliková & Marianna SiniÄ Ã¡ková & Denis Horváth, 2014. "Twin Deficits in Small Open Baltic Economies," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 227-239, March.
    3. repec:eee:jpolmo:v:40:y:2018:i:2:p:328-349 is not listed on IDEAS

    More about this item

    Keywords

    Covariance decomposition; Vector autoregression; Small open-economy; Overlapping generations; Heterogeneous goods;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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