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Twin deficits revisited: A role for fiscal institutions?

Author

Listed:
  • António Afonso

    (ISEG Lisbon School of Economics and Management - ULISBOA - Universidade de Lisboa = University of Lisbon = Université de Lisbonne [Lisboa])

  • Florence Huart

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • João Tovar Jalles

    (Instituto Superior de Economia e Gestão (ISEG))

  • Piotr Stanek

    (Cracow University of Economics)

Abstract

We revisit the twin-deficits relationship for a sample of 65 countries with fiscal rules over the period 1985–2015, using a panel data estimation methods. Our analysis accounts for the role of various types of fiscal rules and institutions: expenditure rules, revenue rules, budget balance rules, debt rules, fiscal councils, and supporting procedures. We find that the twin-deficits hypothesis is confirmed. The impact of the budget balance on the current account balance is increased when fiscal rules are considered, except with revenue rules and debt rules. Well-designed fiscal rules, fiscal councils and features that reinforce compliance with rules improve the current account balance. Our findings highlight the role of fiscal factors in explaining sustained global current account imbalances. They also contribute to the ongoing discussion about the improvement of macroeconomic and budgetary surveillance in the European context.

Suggested Citation

  • António Afonso & Florence Huart & João Tovar Jalles & Piotr Stanek, 2022. "Twin deficits revisited: A role for fiscal institutions?," Post-Print hal-03702590, HAL.
    • Handle: RePEc:hal:journl:hal-03702590
    DOI: 10.1016/j.jimonfin.2021.102506
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    Cited by:

    1. Chrysanthakopoulos, Christos & Tagkalakis, Athanasios, 2023. "The effects of fiscal institutions on fiscal adjustment," Journal of International Money and Finance, Elsevier, vol. 134(C).
    2. Christos Chrysanthakopoulos & Athanasios Tagkalakis, 2024. "Tax policy cyclicality and financial development," Economics and Business Letters, Oviedo University Press, vol. 13(1), pages 48-57.
    3. Umer Jeelanie Banday & Ranjan Aneja, 2019. "Correction: Twin deficit hypothesis and reverse causality: a case study of China," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 5(1), pages 1-1, December.
    4. Barbara Brixova & Veronika Sulikova & Marianna Sinicakova & Val ria Levandovska, 2025. "When Inflation Drives Twin Deficits Catch in the Eurozone," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 27(70), pages 1127-1127, August.
    5. Omidi, Vahid & Goudarzi Farahani, Yazdan & Roudari, Soheil, 2022. "نرخ ارز، کسری دوگانه و اثر پاتینکین در اقتصاد ایران: آیا ارتباط مقیاس-زمانی مسئله است؟ [Exchange rate, twin deficit and Patinkin effect in Iran's economy: Is the time-scale relationship a problem?]," MPRA Paper 127008, University Library of Munich, Germany, revised 23 May 2023.
    6. George Petrakos & Kostas Rontos & Luca Salvati & Chara Vavoura & Ioannis Vavouras, 2022. "Domestic vs. External Economic Sectors and the Political Process: Insights from Greece," Economies, MDPI, vol. 10(8), pages 1-13, August.
    7. Keita, Kady & Rabaud, Isabelle & Turcu, Camelia, 2023. "Fiscal outcomes, current account imbalances, and institutions in Europe: Exploring nonlinearities," International Economics, Elsevier, vol. 175(C), pages 121-134.
    8. Afonso, António & Coelho, José Carlos, 2022. "The role of fiscal policies for external imbalances: Evidence from the European Union," Economic Systems, Elsevier, vol. 46(2).
    9. António Afonso & José Carlos Coelho, 2023. "Twin deficits through the looking glass: time-varying analysis in the Euro area," Economic Change and Restructuring, Springer, vol. 56(4), pages 2087-2110, August.
    10. Ablam Estel Apeti & Bao We Wal Bambe & Jean-Louis Combes, 2025. "On the macroeconomic effects of fiscal reforms: fiscal rules and public expenditure efficiency," Public Choice, Springer, vol. 205(1), pages 19-47, October.
    11. António Afonso & José Carlos Coelho, 2021. "Fiscal and current account imbalances: the cases of Germany and Portugal," Working Papers REM 2021/0208, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    12. Potrafke, Niklas, 2025. "The economic consequences of fiscal rules," Journal of International Money and Finance, Elsevier, vol. 153(C).
    13. Andrei Rădulescu, 2025. "The Relation Between The Twin Deficits In Romania," Romanian Economic Business Review, Romanian-American University, vol. 20(3), pages 28-36, September.
    14. Ricardo Barradas & João Alcobia, 2024. "Determinants Of The Portuguese External Imbalances: The Lens Of Post-Keynesian Economics," Working Papers REM 2024/0334, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    15. Hammed Adededji Adetokunbo & Blaise Gnimassoun & Anthony Simpasa, 2025. "Intra-African immigration and Africa’s external performance," Working Papers of BETA 2025-03, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    16. Brito Romero, Marycris & Peguero, Anadel G. & Cruz-Rodríguez, Alexis, 2020. "¿Hay evidencias de déficits gemelos en la economía dominicana? [Is there evidence of twin deficits in the Dominican economy?]," MPRA Paper 100938, University Library of Munich, Germany.
    17. López-Villavicencio, Antonia & Zoumenou, Jocelyne, 2025. "Do commitment and enforcement of fiscal rules enhance fiscal stability? Evidence from European Union countries," Journal of Macroeconomics, Elsevier, vol. 84(C).
    18. Chrysanthakopoulos, Christos & Tagkalakis, Athanasios, 2023. "Fiscal rules and tax policy cyclicality," Economics Letters, Elsevier, vol. 225(C).
    19. António Afonso & Philemon Kwame Opoku, 2018. "The Relationship between Fiscal and Current Account Imbalances in OECD Economies," Working Papers REM 2018/61, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    20. Yu HSING, 2019. "Does the Mundell-Fleming Model apply to Poland?," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(621), W), pages 265-272, Winter.
    21. Haiyue Liu & Jianwu Ren, 2024. "Do budget deficits cause current account deficits? a re-evaluation utilizing military expenditures as an instrumental variable," PLOS ONE, Public Library of Science, vol. 19(10), pages 1-26, October.
    22. Sven Langedijk & Aurélien Poissonnier & Edouard Turkisch, 2023. "The impact of macroeconomic developments and imbalances on fiscal outcomes," SN Business & Economics, Springer, vol. 3(6), pages 1-29, June.
    23. Davide Furceri & Aleksandra Zdzienicka, 2020. "Twin Deficits in Developing Economies," Open Economies Review, Springer, vol. 31(1), pages 1-23, February.

    More about this item

    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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