New Evidence on the Asymmetric Linkages Between Fiscal and Current Account Balances

The paper presents empirical evidence on the relationship between current account and fiscal balance for Portugal, Ireland, Italy, Greece, and Spain during the last two decades, by applying a threshold autoregressive methodology initially developed by Enders and Siklos (Journal of Business and Economic Statistics, 19(2), 166–176, 2001) and further developed by Sun (Forest Policy and Economics, 13(6), 479–487, 2011). Our empirical findings show that, first, the relationship between current account and budget balance is characterized by non-linearities, and there is evidence of an asymmetric adjustment within the framework of a long-term cointegration relationship. Second, in the long run, a restrictive fiscal policy is the proper tool for improving the current account balance and the growth prospect for all countries under consideration. Third, in the short run, the adjustment process after a shock takes place, primarily, through the level of the current account, while the budget balance evolves more independently, thus acting as the exogenous variable.