Revisiting the Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account
This paper investigates the effect of fiscal consolidation on the current account. We examine contemporaneous policy documents, including Budget Speeches, Budgets, and IMF and OECD reports, to identify changes in fiscal policy motivated primarily by the desire to reduce the budget deficit, and not by a response to the short-term economic outlook or the current account. Estimation results based on this measure of fiscal policy changes suggest that a 1 percent of GDP fiscal consolidation raises the current account balance-to-GDP ratio by about 0.6 percentage point, supporting the twin deficits hypothesis. This effect is substantially larger than that obtained using standard measures of the fiscal policy stance, such as the change in the cyclically adjusted primary balance.
Volume (Year): 59 (2011)
Issue (Month): 4 (November)
|Contact details of provider:|| Web page: http://www.palgrave-journals.com/|
|Order Information:|| Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK|
Web: http://www.palgrave-journals.com/pal/subscribe/index.html Email:
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.:
- Chinn, Menzie D. & Ito, Hiro, 2007.
"Current account balances, financial development and institutions: Assaying the world "saving glut","
Journal of International Money and Finance,
Elsevier, vol. 26(4), pages 546-569, June.
- Menzie D. Chinn & Hiro Ito, 2005. "Current Account Balances, Financial Development and Institutions: Assaying the World "Savings Glut"," NBER Working Papers 11761, National Bureau of Economic Research, Inc.
- Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
- Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2005.
"Productivity shocks, budget deficits and the current account,"
Working Paper Series
0509, European Central Bank.
- Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2010. "Productivity shocks, budget deficits and the current account," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1562-1579, December.
- Ali Abbas, S.M. & Bouhga-Hagbe, Jacques & Fatás, Antonio & Mauro, Paolo & Velloso, Ricardo C., 2010.
"Fiscal Policy and the Current Account,"
CEPR Discussion Papers
7859, C.E.P.R. Discussion Papers.
- Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2008. "The Effects of Public Spending Shocks on Trade Balances and Budget Deficits in the European Union," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 414-423, 04-05.
When requesting a correction, please mention this item's handle: RePEc:pal:imfecr:v:59:y:2011:i:4:p:582-602. 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: (Daniel Foley)
If references are entirely missing, you can add them using this form.