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Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective

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  • Hany Eldemerdash

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  • Hugh Metcalf
  • Sara Maioli

Abstract

We test the relationship between the current account and fiscal policy for a group of small open developing economies with fixed exchange rates some of which are oil exporters. Specifically, we test the viewpoint of a Ricardian infinite-horizon representative agent model in which lower public savings are met by equal increases in private savings, and as a result the current account does not respond to the changes in government spending, against a Keynesian’s conventional viewpoint in which a fall in public savings has an adverse effect on the current account balance. Unlike the evidence from flexible exchange rate economies provided by many authors such as Rosensweig and Tallman (Econ Inq 31(4):580–594, 1993 ), Erceg et al. (Int Finance 8(3):363–397, 2005 ) and Saleh et al. (South Asia Econ J 6(2):221–239, 2005 ), the evidence from a panel data analysis and Granger-causality test of these fixed exchange-based countries supports the conventional theory of positive relationship between fiscal and external balances, with causality running from the former to the latter, in oil countries, whereas it supports the Ricardian view for non-oil countries. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Hany Eldemerdash & Hugh Metcalf & Sara Maioli, 2014. "Twin deficits: new evidence from a developing (oil vs. non-oil) countries’ perspective," Empirical Economics, Springer, vol. 47(3), pages 825-851, November.
  • Handle: RePEc:spr:empeco:v:47:y:2014:i:3:p:825-851
    DOI: 10.1007/s00181-013-0771-9
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    Cited by:

    1. Ahmad Zubaidi Baharumshah & Siew-Voon Soon & Mark E. Wohar, 2019. "Fiscal stance, foreign capital inflows and the behavior of current account in the Asian countries," Empirical Economics, Springer, vol. 56(2), pages 523-549, February.
    2. Shruti Shastri & A. K. Giri & Geetilaxmi Mohapatra, 2017. "Assessing the Triple Deficit Hypothesis for Major South Asian Countries: A Panel Data Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 292-299.
    3. Karras, Georgios, 2019. "Are “twin deficits” asymmetric? Evidence on government budget and current account balances, 1870–2013," International Economics, Elsevier, vol. 158(C), pages 12-24.
    4. Georgios KARRAS, 2019. "“Twins” Or Just “Siblings”?Budget And Current Account Deficits In Europe, 1870-2013," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 19(1), pages 33-42.
    5. Samia OMRANE BELGUITH, 2016. "Twin deficit in MENA countries: an empirical investigation," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 123-146, June.

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    More about this item

    Keywords

    External balance; Fiscal balance; Current account ; Fiscal policy; Panel data; Twin deficits; E0; H62; F41;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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